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Updated 1/08/05, 11:50am WA (adds EDS Stock Drops)

Analysis of Institutional Shareholdings of Top 8 U.S. IT Services Firms, Plus Fujitsu, Capgemini and Top Software Cos.

EDS: The Titanium Stock

EDS Shares Rise in Second Half of 2004 Despite Dismal Business News, Propped by Heavy Institutional Buying; Same Pattern Second Year in a Row

WESTERN AUSTRALIA, Dec 31 – It’s always good to have friends in high places, the kind that pull you up when you’re falling through thin ice.  Well, Michael Jordan, EDS’ CEO, evidently has lots of them on Wall Street.  Together they’ve build EDS into a “titanium[1] stock” while skating on thin ice.  And that’s quite a circus act…

Nothing seemed to faze the EDS investors this year.  Not a slew of additional bad news about its Navy deal.  Not the credit downgrades.  Not the new job cuts.  Not even the twice-delayed release of quarterly results by its auditors.   And certainly not a poor business performance.  The EDS shares kept going up in the second half of 2004 as if the company were a thriving concern.  

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How’s that possible?  It is.  If you have friends in the right places.  Even last year, when the EDS stock exhibited the same trading pattern (see the chart), the company had the highest institutional shareholding of any IT firm we follow (91% vs. 56% for IBM or 66% for HP, for example).

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As institutions kept buying up EDS share on bad news stories to protect their original investments and prop up the price, their ownership increased to 92% in 2004.  This made EDS seemingly impervious to bad news.  So far...  

But no scheme lasts forever.  What goes up must come down.  Eventually.  So it will the “titanium stock” – EDS.  Probably starting in the New Year, just as was the case last year.  Institutions like to dress up their balance sheets to make themselves look good for the year-end reports.  After December 31, a dose of reality may set in, and some of them may start to unload EDS while the going is good (see update Jan 7, 2005).

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Some major Wall Street players didn’t wait that long.  Morgan Stanley, Fidelity and Oppenheimer, for example, were no longer among the top 25 EDS institutional shareholders as of September 30, having dumped most or all of their EDS shares earlier in the year.  But the threesome was definitely a minority.  For, 20 of top 25 actually added to their EDS positions, as did 8 of the top 10 (see the charts).

"What Goes Up Must Come Down:" EDS Did!

"What goes up must come down.  Eventually.  So it will the 'titanium stock' – EDS," we said in our year-end Annex Bulletin on institutional investors' holdings and tactics.  "After December 31, a dose of reality may set in, and some of them may start to unload EDS while the going is good."

Well, that's exactly what happened during the first week of trading of 2005 (see above chart).  The EDS stock dropped at more than double the rate of the market's decline.  Some stocks may be entirely too predictable... J

IBM: Stable Investor Stable

It is almost ironic that, by contrast, six of top 10 IBM institutional shareholders reduced their positions in the third quarter just as Big Blue demonstrated that its rebound, particularly in the server units, was for real.

For the year, however, there has not been much action with IBM shares.  Exiting 2004, IBM’s market cap is only about 4% higher than it was a year ago.  Big Blue’s institutional ownership also remained stable at 56% of total shares, as did its insider holdings – at 1% of the total.

So stability seemed to be the name of the game for the IBM stock in 2004.  The company has become once again a classic “hold,” a relatively safe haven in stormy seas.

HP: More Downs Than Ups

Well, if EDS vs. IBM stock performance were a study in contrasts, then EDS vs. HP share analysis would be a grotesque example of opposites that do not attract.  While EDS could seemingly do no wrong in 2004, according to Wall Street, HP could apparently do nothing right, its investors’ actions are suggesting.  The business reality, however, is quite the opposite.  HP produced stellar revenue and profit growth while EDS… Well, you already know what EDS did.  No need to beat up on it anymore.

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Meanwhile, back to HP, the company tried to woe its investors by accelerating the stock buybacks in the third and fourth quarters.  It didn’t work.  The company’s market cap still ended the calendar year down about 10% despite the strong business results, and solid shareholder support (eight of top 10 added to their HP positions – see the chart).

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Perhaps in 2005 HP should stop wasting its shareholders’ money on share repurchases and try another tack at wooing Wall Street investors?  Especially since some major shareholders (e.g., Smith Barney, Mellon, etc.) evidently threw in the towel and exited the top 25 HP institutional holders list, while Wellington Management sold off about three-quarters of its holdings.

More than offsetting that, however, were the HP stock purchases of five new holders in the top 25.  Also, among the biggest existing institutional shareholders, Dodge & Cox, Deutsche Asset Management, Capital Research, Merrill Lynch and Barclays all increased their holdings in double digits, thus accounting for a rise in the HP stock in the last three months of the year.

Accenture: Least Volatile

Accenture’s shares closed up 4% for the year after a seesaw performance during the last 12 months.  Guess all’s well that ends well.  And 2004 has certainly ended well for Accenture.

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The fact that the company finished the year very close to its all-time high (reached in July), despite having gone through both the CEO and the CFO changes in 2004, is a credit to its management and good investor relations.

Its institutional shareholders agreed.  Eight of top 10 gave the new Accenture leaders their vote of confidence by adding big bucks to their stock positions.  As a result, the institutional shareholders’ share of ownership jumped from 31% to 37%.  This still keeps Accenture as the company with the lowest institutional ownership of all top eight U.S. IT services firms we follow (see the chart).  And that makes its stock the least volatile as compared to its peers.

The lead investment banker in Accenture’s public offerings was one of the two top institutional holders to reduce its Accenture position in the first nine months of 2004.  Morgan Stanley sold off a little more than two million shares, possibly to cash in its profit while the stock was at or near its all-time high?

Fidelity, Artisan Partners, Ariel and John Levin & Co. were also among the minority of seven of Accenture’s top 25 institutional shareholders who reduced their positions in 2004.

Wellington Management, however, already the biggest holder, boosted its position by 36%.  Barclays and Mfs Investments, the second and third largest Accenture owners, really dove into the stock with 146% and 211% increases in their ownership.

Wellington’s increase of Accenture holdings stands out by contrast considering that this major Wall Street player reduced all of its other major IT holdings by September 30, 2004, including its positions in IBM, HP and CSC.

CSC: Best Performance

Bad move… At least when it came to CSC.  For, this major defense contractor’s stock experienced the biggest rise among the top eight U.S. IT services firms.  CSC’s market cap went up 29% in 2004.  At $56.37 (Dec 31), the CSC stock is now just a shade under its 52-week high of $58.

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No surprise there.  Here’s what we said in early February 2004 about why we thought the CSC stock was undervalued compared to its rivals:

“On balance, there seem to be at least as many reasons to cheer the latest CSC report card, as there are to pan them.  Surging sales are bound to translate into growing revenues and profits in the future.  Yet Wall Street has chosen to ignore the good and boo the bad.  As a result, CSC’s devalued stock price, even if it is still within 10% of its 52-week high, appears a relative bargain compared to its major rivals.”

(An excerpt from “Good Quarter Get Boos on Wall Street,” Feb 2004).

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It appears that Wall Street “heard us.”  And the institutions loaded up on CSC stock, boosting their share of ownership from 77% to 80%.  Eight of top 10 CSC holders added to their positions; 17 of the top 25.

But not all major institutional holders were CSC boosters.  JP Morgan Fleming, Morgan Stanley and Capital Research were among the Wall Street notables that exited the top 25 list in the first nine months of the year.  And, of course, we’ve already mentioned Wellington that reduced its CSC holdings by a whopping 70% by September 30, 2004.

Market Bearing Down on BearingPoint; Boosting ACS, Perot

The three smallest companies among the top eight U.S. IT services competitors – ACS, BearingPoint and Perot Systems – had their shares subjected to vastly diverse Wall Street treatments in 2004.  While the market was bearing down on BearingPoint, pushing the stock down 18% for the year, it was boosting the market caps of ACS and Perot Systems by 10% and 23% respectively.

Ironically, the institutional ownership of BearingPoint actually increased (from 72% to 80%) while the stock declined, suggesting that it was the public investors who seemed to have voted with their feet. 

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Similarly, the ACS institutional ownership actually declined (from 94% to 93%) while its market cap rose, implying that some institutions cashed in on the rising stock price as the public was buying.

The Perot Systems’ trading patterns, however, suggested that the institutions loaded up on the stock as they pushed it up, too.  Their ownership jumped from 41% to 48% while the shares surged by 23%.  

Overseas Markets: Fujitsu Up, Capgemini Down

While the detailed institutional ownership data isn’t readily available for the two leading overseas competitors among the top 10 global IT services firms – Fujitsu and Capgemini – one can discern different trading patterns that the Tokyo and Paris markets accorded the duo.

Fujitsu shares ended up the year at ¥667, slightly up for the year, after peaking in early June. 

The Capgemini stock, however, was down about 33% for the year to 23.56, after reaching the trough of €17.40 in mid-October.  In other words, both leading overseas IT competitors finished the year on an upswing. 

Software Leaders: Microsoft – Bottom of Heap; CA on Top

There aren’t many competitions in which Microsoft ends up at the bottom of the heap.  But that’s exactly where Microsoft placed in 2004 among the leading software companies’ stock performances.

Perhaps surprisingly, the beleaguered Computer Associates (CA) ended up on top, followed by SAP and Oracle, the recent winner of the 18-month, $10 billion+ PeopleSoft beauty contest.

Happy New Year!

Bob Djurdjevic

P.S. For Annex Research clients only... To view a table of the top 25 institutional shareholders of the Top 8 U.S. IT services companies, click here.

[1] TITANIUM (Ti, atomic number 22) is a lustrous gray metallic element used principally to make lightweight, resistant alloys. It has many desirable properties, most notably incredible strength and durability.   Titanium is immune to corrosive attacks by saltwater and marine atmosphere and exhibits exceptional resistance to a broad range of corrosive gases, acids and alkalis. Titanium is immune to microbiologically influenced corrosion and is physiologically inert and hypoallergenic. Titanium is virtually non-magnetic, making it ideal for applications where electromagnetic interference must be minimized. Pure titanium is about as strong as steel yet nearly 50% lighter. When added to various alloys, its strength can be increased dramatically.  Enter EDS… J

For additional Annex Research reports, check out... 

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

Or just click on and use appropriate  keywords.

Volume XX, Annex Bulletin 2004-27
December 31, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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