Should You Add DXC Technology Stock to Your Portfolio in 2022?

DXC Technology (DXC) continues to undertake various strategic plans and partnerships to boost its operational efficiency. However, the company has increased its expected revenue contraction rate for FY22. So, is it worth betting on the stock now? Read on to find out.

DXC Technology (DXC) assists multinational corporations in operating mission-critical systems and operations while modernizing IT, optimizing data structures, and assuring security and scalability across public, private, and hybrid clouds. 

The stock of the Mc Lean, Va.-based concern has gained 15.9% in price over the past month.

However, the company reported weak financials in the last reported quarter. In addition, the business revised its revenue contraction forecast for 2022 from a range of 1% - 2% to a range of 2.2% - 2.3%. This could impact its stock’s price performance in the coming weeks.

Here's what could shape DXC's performance in the near term:

Positive Development

Last month, DXC announced the launch of a new global DXC ServiceNow Strategic Business Group to offer market-leading, cost-effective, robust technology services that revolutionize corporate service operations based on the DXC Platform XTM. DXC has designated ServiceNow as the preferred workflow partner for DXC Platform X, a data-driven, intelligent automation platform that aids in detecting, preventing, and resolving issues with robust, self-healing IT estates.

Discounted Valuations

In terms of forward non-GAAP P/E, the stock is currently trading at 10.58x, which is 51.5% lower than the 21.80x industry average. Also, its 0.58x forward Price/Sales multiple is 84.42% less than the 3.72x industry average. Furthermore, DXC's 1.98x forward Price/Book is 63.50% less than the 5.43x industry average.

Poor Financials

DXC's total revenue has declined 4.6% year-over-year to $4.09 billion for the third quarter, ended Dec. 31, 2021. Its operating expenses grew 69.8% from the prior-year quarter to $3.92 billion. And the company's net income decreased 91.1% from its year-ago value to $98 million, while its EPS narrowed 91.1% year-over-year to $0.38.

Mixed Profitability

DXC's 22.5% trailing-12-month gross profit margin is 54.9% less than the 49.9% industry average. Also, its ROC, levered FCF margin, and CAPEX/Sales multiple are 62.7%, 64.3%, and 30.7% lower than their respective industry averages. However, DXC's $950 million trailing-12-month cash from operations is 807.1% higher than the $104.73 million industry average.

POWR Ratings Reflect Uncertainty

DXC has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. DXC has a C grade for Stability and Quality. The stock’s 2.35 beta  is in sync with the Stability grade. In addition, the company's mixed profitability and poor financials are consistent with the Quality grade.

Among the 81 stocks in the D-rated Technology - Services industry, DXC is ranked #30.

Beyond what I've stated above, one can view DXC ratings for Growth, Value, Momentum, and Sentiment here.

Bottom Line

DXC’s shares have gained 46.2% in price over the past year based on the company’s strategic investments to boost growth across its various business segments. However, analysts expect its revenue to decline by 7.6% year-over-year to $16.39 billion in fiscal 2022. In addition, the company's mixed profitability and weak financials pose a threat to its near-term price performance. So, we think investors should wait before scooping up its shares.

How Does DXC Technology Company (DXC) Stack Up Against its Peers?

While DXC has an overall C rating, one might want to consider its industry peers, Sanmina Corporation (SANM), Celestica Inc. (CLS), and PC Connection Inc. (CNXN) which have an overall A (Strong Buy) rating.

DXC shares were trading at $38.24 per share on Thursday morning, down $0.39 (-1.01%). Year-to-date, DXC has gained 18.79%, versus a -4.42% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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