Perspecta Inc: Attractive Valuation Offers a Downside Buffer for IT Provider

prsp stockPerspecta Inc Insiders Are Buying This Contrarian IT Play

The Nasdaq traded over 12,000 on September 2 prior to the subsequent retrenchment that has the index in correction territory. And, while many of the biggest technology stocks are holding up, a dismal 21% of Nasdaq stocks are above the key 50-day moving average and 56% are above the 200-day moving average.

When I was searching for battered contrarian technology stocks, mid-cap information technology (IT) solutions provider Perspecta Inc (NYSE:PRSP) surfaced. It’s down 28% this year, well short of the Nasdaq.

Perspecta provides IT solutions to the U.S. government, including the defense, intelligence, civilian, health-care, and state and local markets.

There is clearly some apprehension towards Perspecta stock due to concerns that the government will need to scale back on spending because of massive COVID-19 expenses. This is a valid concern, but the government still needs to make sure IT systems are up to date.


As such, PRSP stock should be viewed as a speculative contrarian investment.

The one-year chart of Perspecta stock showed the strong upward trendline from March 2019 to February 2020 prior to the breakdown.

PRSP stock tanked after failing to break above $30.00 in February 2020. The breakdown was followed by a bearish “falling knife” in March and the emergence of a “death cross.” This a bearish signal that occurs when the 50-day moving average breaks below the 200-day moving average.

Perspecta stock is currently in a downtrending channel; it could fall towards $18.00. For PRSP stock to rally, we need to see an improvement in the relative strength index and moving average convergence/divergence.

Technically, Perspecta Inc has the ability to mount a strong oversold rebound back towards the $27.00 and $30.00 levels if the broader market can stabilize.

Higher Profitability Makes PRSP Stock Attractive

Perspecta Inc increased revenues in the last two straight fiscal years, including a record $4.5 billion in fiscal 2020 (ended March).

Fiscal Year Revenue (Billions) Growth
2018 $2.8 N/A
2019 $4.0 42.90%
2020 $4.5 11.80%

(Source: “Perspecta Inc.,” MarketWatch, last accessed September 25, 2020.)

But, PRSP is estimated to see its revenues contract 2.6% to $4.39 billion in fiscal 2021 followed by a decline of 8.9% to $4.0 billion in fiscal 2022. (Source: “Perspecta Inc. (PRSP),” Yahoo! Finance, last accessed September 25, 2020.)

Perspecta produced positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in the last three years, including two consecutive years of growth.

Fiscal Year EBITDA (Millions) Growth
2018 $482.0 N/A
2019 $687.0 42.50%
2020 $741.0 7.90%

(Source: MarketWatch, op. cit.)

PRSP delivered generally accepted accounting principles (GAAP) profits in fiscal 2018 and fiscal 2019, prior to a loss in fiscal 2020.

Fiscal Year GAAP Diluted EPS Growth
2018 $1.46 N/A
2019 $0.44 -70.10%
2020 -$4.17 -1055.40%

(Source: MarketWatch, op. cit.)

Perspecta is estimated to report an adjusted $1.96 per diluted share in fiscal 2021, compared to $2.16 per diluted share in fiscal 2020, prior to slipping to $1.84 per diluted share in fiscal 2022. (Source: Yahoo! Finance, op. cit.)

But trading at 10 times fiscal 2022 earnings is pretty darn good in the tech space.

In the meantime, PRSP delivered positive free cash flow in three straight years, including a 39.7% jump in fiscal 2020.

Fiscal Year FCF (Millions) Growth
2018 $512.0 N/A
2019 $436.0 -14.80%
2020 $609.0 39.70%

(Source: MarketWatch, op. cit.)

The main threat for Perspecta stock is its weak balance sheet, which could present some issues if the pandemic impact worsens.

PRSP needs to strengthen its weak working capital and address its massive $2.8 billion in debt. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Perspecta stock has broad institutional ownership. About 575 institutions hold a 77% stake in outstanding PRSP stock. (Source: Yahoo! Finance, op. cit.)

Institutional ownership is relatively strong. The ownership is broad, with 575 institutions holding a 77% stake in the company’s outstanding shares. (Source: Yahoo! Finance, op. cit.)

The risk for Perspecta is its balance sheet. The valuation metrics are attractive, so they could provide a downside buffer in this current market.