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Is DXC Technology's (DXC) Place in Your Portfolio Justified?

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DXC Technology Company (DXC) has been a favorite among investors, courtesy of its strategic deals, spin-off initiatives and senior notes offerings. Shares of DXC Technology have gained 53.9% on a year-to-date basis, significantly outperforming the 30.8% rally of the industry it belongs to.

Let's now delve deeper and take a look at some of the aspects aiding the company's performance.

Strategic DealYield Favorably

DXC Technology recently announced entering into an agreement with Logicalis Group to buy the latter's service management consultancy operation - Logicalis SMC.

Logicalis SMC is one of the biggest integrator of ServiceNow Inc.'s (NOW) software and solutions, a primary reason behind DXC Technology's move. The integration of Logicalis SMC business will fortify DXC Technology's position as a leading global software integrator for ServiceNow. The acquisition will help the company expand presence across Europe. Further, it will strengthen its "scale, reach, industry experience and skills portfolio in the fast-growing enterprise software-as-a-service (SaaS) market."

Going forward, the company acquired privately-held Tribridge in July. The company is one of the largest independent integrators of Microsoft's (MSFT) Dynamics 365, which explains why this buyout makes sense for DXC Technology.

These buyouts have aided the company to enhance its portfolio, which is likely drive growth over the long run.

Apart from buyouts, the company expanded ties with VMware at VMworld 2017. The two entities are coming together to debut the latest DXC Managed Cloud Services supported by VMware's next generation hybrid cloud platform. This contract will enable DXC Technology's clients to run VMware software (vSphere, Virtual SAN and NSX) on the Amazon.com's (AMZN) Amazon Web Services (AWS) to deliver enhanced performance for networking customers.

VMware remains one of the leading companies in the virtualization and cloud computing space. With such partnership, DXC is well poised to benefit from the increasing adoption of cloud-based solutions and offer an efficient and improved hybrid IT environment to drive performance.

The Spin-Off

Last week, DXC Technology announced the spin-off of its U.S. Public Sector (USPS) business, and subsequently merging the same with Vencore Holdings and KeyPoint Government Solutions. The three companies have come together to form a publicly-traded IT service-providing company, primarily to the U.S. government. Notably, Vencore and KeyPoint are owned by private-equity firm Veritas Capital.

Initially, the new company will have a total workforce of over 14,000 and generate annual revenues of approximately $4.3 billion. Per the agreement, the deal will be structured as a 'Reverse Morris Trust' transaction, consequently making the entire transaction tax-free to DXC Technology and its shareholders.

Upon completion of the deal, shareholders of DXC Technology will receive 86% of the combined company's shares. Along with this, the company will receive $1.05 billion of cash from USPS, upon the completion of its spin-off. The proceeds from USPS are intended to be used for debt repayments, share buyback and other general corporate purposes.

Moreover, in the last reported quarter (first-quarter of fiscal 2018) revenues from USPS segment were $677 million, down 3.5% year over year. Consequently, spinning off this segment can be deemed as a wise decision on the company's part.

Per the company, the IT services market for both commercial and the U.S. public sectors has been evolving at an accelerating pace. Therefore, DXC Technology's latest spin-merger move is believed to provide it a customized approach toward handling two different types of clients. Upon the successful formation, the new company will become one of the top five IT services providers to the U.S. government.

The reinforced capabilities will help the new company win government contracts, in turn bringing in more revenues, in our opinion.

Senior Notes Offerings

DXC Technology had also announced the pricing of a Senior Floating Rate Notes offering worth $650 million. Notes, carrying an interest rate equal to three-month LIBOR plus 0.95% per year, are set to mature in 2021. The company intends to use the proceeds from the offering for general corporate purposes, which also include the repayment of outstanding indebtedness.

Borrowing costs continue to be low, enabling companies to obtain easy financing. With the U.S. treasuries offering low rates, corporate bonds and borrowings from banks are now witnessing high demand. We believe that these notes will provide financial flexibility to the company and propel long-term growth.

Wrapping Up

DXC Technology is a result of the merger between Computer Sciences Corporation and Enterprise Services Division of Hewlett Packard Enterprise, which was concluded on Apr 1, 2017.

The company noted that the merger has opened up new avenues of growth and will help the combined entity to become a leading player in the IT services domain. Post-merger, DXC Technology became the world's second largest end-to-end IT services providing company after Accenture plc.

Owing to such upsides, the stock has a long-term growth rate of 8% and a VGM Score of A.

DXC currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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