Data from China suggests that economic activity could resume after initial containment and not trigger new COVID-19 cases

Summary

- A study was published in early 2020 by Ainslie and colleagues (), suggesting that, after initial containment is achieved, within-city movement (measured through a “Movement Index”) seems to be uncorrelated with new COVID-19 cases.

- Within-city movement is used in the study as a proxy for economic activity.

- Economic activity seems to have successfully resumed within approximately 2 weeks from containment, and approximately 4 weeks from the peak of new cases.

Within-city movement vs. new COVID-19 cases

The graphs below summarize key results from a study published in early 2020 by Ainslie and colleagues (). Dr. Ainslie is in the Faculty of Medicine, School of Public Health, Imperial College London. The study looked at within-city movement, as a proxy for economic activity, and how that movement has influenced the numbers of new cases of COVID-19 in various areas, after initial containment.

As you can see, after initial containment is achieved, within-city movement (measured through a “Movement Index”) seems to be uncorrelated with new COVID-19 cases; or somewhat negatively correlated, as the authors note. This rather surprising and counterintuitive outcome may be due to people becoming much more cautious about social interactions.

Time to resumption of economic activity

Note from the graphs that economic activity seems to resume within approximately 2 weeks from containment, and approximately 4 weeks from the peak of new cases.

Also note that containment has been fairly effective in China. The Chinese government has enforced it through strict lockdowns. Perhaps this is what makes people so cautious about social interactions afterwards, which we speculate might be at the source of the success of their strategy.

From an economic revival perspective, these are good news – particularly if the same approach can be replicated in other countries and regions.

A simulation-based valuation of DXC Technology (DXC): March 2020

Summary

- DXC Technology (DXC) is a technology consulting and services company headquartered in Tysons Corner, Virginia ().

- Launched in April of 2017, DXC was created from the merger of Computer Sciences Corporation (CSC) and the Enterprise Services division of Hewlett Packard Enterprise (HPE).

- In this post we provide a simulation-based (sim-based) valuation () of DXC.

- Our results suggest the following fair values – stock price: $64.12, and price-to-earnings ratio: 9.96.

- DXC currently trades at $15.14, so it appears to be undervalued, with a potential upside of 323.51%.

DXC Technology (DXC)

DXC Technology (DXC) is a technology consulting and services company headquartered in Tysons Corner, Virginia. Launched on April 3, 2017, DXC was created from the merger of Computer Sciences Corporation (CSC) and the Enterprise Services division of Hewlett Packard Enterprise (HPE).

The company operates in more than 70 countries, and counts among its customers several federal and regional government agencies. In many ways DXC is similar to Accenture (ACN). In fact, DXC has a new CEO, Mike Salvino, who previously served as group CEO for Accenture Operations.

Estimating a fair value for the stock

In this post we provide a simulation-based (sim-based) valuation () of DXC.

At the time of this writing the company had a negative net profit margin of -8% and a price-to-sales ratio of 0.26. The company has great growth potential, as long as it transitions from legacy technology services to more modern offerings (e.g., cloud applications). This transition seems to be a major focus of the new CEO.

To be somewhat conservative, we will use recent numbers from Accenture to set our sim-based estimated earnings growth rate for the next 5 years (6.47%) and net profit margin (11.06%). We believe this to be a conservative approach because DXC is much smaller than Accenture; e.g., DXC’s revenues are about half of Accenture’s.

Another reason why we believe the above is a conservative approach is that it is quite possible that we currently are in a recession (yes, already), in which case earnings growth should be much higher than it is now in the near future. Sales are likely to go up, and so should earnings – the latter at a faster pace, leading to higher margins for many of DXC’s services (the same goes for Accenture).

The table below summarize our sim-based results.

Since our sim-based analysis uses a S&P 500 return as a basis, our results summarized on the table above suggest the following fair values – stock price: $64.12, and price-to-earnings ratio: 9.96. DXC currently trades at $15.14, so it appears to be undervalued, with a potential upside of 323.51%. Yes, you read it right. The company seems to be more than simply cheap; it appears to be dramatically undervalued at the moment.

Note that we assumed a positive net profit margin of 11.06% for a company that actually has a net profit margin of -8%. This type of assumption is useful in valuing companies that have a negative profit margin, which is often the case with companies that have been experiencing problems; as well as high-growth companies that have been publicly-traded for only a few years.

Other pluses and minuses

DXC pays an attractive dividend of 5.11%, significantly higher than the average S&P 500 dividend. With DXC’s market capitalization of $5 billion, this translates to roughly $255 million per year given out in dividends. DXC has $2.56 billion in cash, so we think that the dividend currently is relatively safe, and will continue being so for several years to come.

While certainly leveraged, DXC has a reasonably attractive balance sheet, with EBITDA in the neighborhood of $3.26 billion. This, added to its cash position of $2.56 billion mentioned above, is actually lower than half of its $10.49 billion dollar debt. So, DXC is leveraged, but much less so than many other companies with much higher valuations.

Is DXC a value trap?

Why does DXC look so undervalued? The reason is a combination of what appears to have been a period of disorganized growth, bad management decisions, somewhat disappointing guidance, the resignation of the former CEO in late 2019; and now, to cap all of this, we have the coronavirus pandemic.

Given the new CEO’s caliber, it is reasonable to expect better stewardship of resources. The coronavirus pandemic is prompting major actions from the US government, including interest rate cuts that should make it easier for DXC to service its debt.

The US government is also promising “as much liquidity as needed”, to avoid layoffs. This means essentially unlimited credit to companies, so that unemployment remains low; this promised by the entity that can print unlimited amounts of it is own currency, the US dollar.

The mighty Office of the US President is fully committed. And we are in an election year. Note that it is not a recession that creates re-election problems for an incumbent US President. Those problems are actually caused by the significant rise in unemployment that usually accompanies a recession. And there can be a recession without unemployment, at least in theory, as long as the country is willing to get into debt up to its ears.

It does not seem like DXC is a value trap; at least not at the current levels. DXC is currently trading at prices not seen since 2012. It has reached a high in the mid-$90s quite recently, in late 2018. If anything, it looks like a big opportunity for investors, as long as the US government keeps its promises of liquidity to address coronavirus-induced sales losses.

Disclosure

The author owns DXC shares at the time of this writing.