Affiliated Computer Svc

Affiliated Computer Services (ACS)
SSG and PERT A (11-24-2004) | Google “Stocks: ACS” | Company Website

The Affiliated Computer Services stock selection guide has been updated. Here are the highlights.

Quality. Section 1 of the SSG (the graph on page one), shows consistent growth. For ACS, the correlation coefficient (r^2) is 1.0 for earnings and .95 for sales. This is quite good. Looking at Section 2 of the SSG, the pre-tax profit margin is trending up and return on equity is even. These are both indicators of consistency and excellent management. Overall, ACS is a high quality company.

Growth. Historically, ACS has had very strong growth. It is a little tricky to estimate future ACS growth since recent financial statement reflect the divestiture of most of ACS’ government business and the acquisition of some new businesses. The management discussion in the current 10Q discusses internal revenue growth (measured as total revenue growth less acquired revenue from acquisitions and revenues from divested operations). After excluding the impact of the revenues related to the 2004 divestitures, revenues in the current quarter increased 22%. Internal revenue growth accounted for 11% of the 22%. The above SSG uses a revenue growth of 15.8% based on Value Line.

Valuation. Using the “preferred proceed” in the SSG, the projected 5-yr EPS is $5.88. (See SSG for pre-tax margin, tax rate and shares outstanding.)

The projected average return over five years is 14.5%. Here is how it is calculated:

Projected 5-yr Price = Projected P/E * Projected EPS Projected 5-yr Price = 19.9 * 5.88 = $117.02Projected Avg Return = [(Future Price / Current Price)^(1/5) + Avg Div Yld – 1] * 100

Projected Avg Return = [(117.01 / 59.53) ^ (1/5) – 1] * 100 = 14.5%

Note: The Toolkit software does this automatically. Reviewing the calculations makes it easier to understand the results.

Summary. ACS (currently $59.53) is in the “buy” range. The upside-downside ratio is 3.9 to 1. The relative value is 100.
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