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Sydnee Gatewood
Sydnee Gatewood
Articles (2960) 

Jana Partners Plows Further Into Perspecta

Activist firm adds to 2nd-largest holding

Investment firm Jana Partners (Trades, Portfolio) revealed last week it boosted its stake in Perspecta Inc. (NYSE:PRSP) by 26.96%.

Taking a value-oriented, event-driven approach to picking stocks, the New York-based firm founded in 2001 by Barry Rosenstein often enters activist positions in order to help unlock value for shareholders.

While the firm initially started buying the stock in the first quarter, it filed for permission to not disclose the position until the second quarter. In June, the investment firm said it plans to push for changes at the company, which provides information technology solutions to U.S. government customers. In a regulatory filing with the Securities and Exchange Commission, Jana said it hopes to pursue discussing "industry consolidation, capitalization and operations," among other topics, with Perspecta's board and management team in order to help increase value.

Having already expanded the position by 120.34% in the second quarter, GuruFocus Real-Time Picks, a Premium feature, showed the activist firm picked up another 2.52 million shares of the Chantilly, Virginia-based company on Sept. 8, impacting the equity portfolio by 4.49%. The stock traded for an average price of $19.85 per share on the day of the transaction.

GuruFocus estimates the firm has lost 8.84% on the investment since establishing it in the first quarter. Now holding a total of 11.8 million shares, Perspecta represents about 21.16% of Jana's equity portfolio and was its second-largest holding as of the three months ended June 30.

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The IT company, which was created in 2018 when DXC Technology (NYSE:DXC) completed a spinoff and merger transaction, has a $3.26 billion market cap; its shares were trading around $20.23 on Tuesday with a price-book ratio of 2.41 and a price-sales ratio of 0.72.

The price chart shows the stock is trading above both the median price-sales value and the median price-book ratio, suggesting it is overpriced.

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Perspecta reported its first-quarter 2021 results on Aug. 6. The company posted adjusted earnings of 47 cents per share on $1.11 billion in revenue, which increased only 1% from the prior-year quarter. Regardless, the company still managed to surpass analysts' estimates for both the top and bottom lines.

In a statement, Chairman and CEO Mac Curtis praised the company's "solid start" to the year, saying its results "continue to demonstrate solid execution across the enterprise, delivering on our revenue, adjusted diluted earnings per share and free cash flow conversion expectations."

"I am pleased with both our operational performance and business development efforts during these challenging market conditions," he said. "Additionally, our new business wins build on the positive momentum in both of our segments and we remain dedicated to meeting our customers' needs and generating value for all our stakeholders."

In a separate statement released that same day, the company announced it had been awarded a $112 million contract with the U.S. Department of Homeland Security to provide full-scope managed IT services for data center and cloud migration support.

This followed two other deals it made in July with the U.S. Army and DARPA.

GuruFocus rated Perspecta's financial strength 3 out of 10 on the back of a low cash-debt ratio and weak interest coverage. The distressed Altman Z-Score of 0.7 also warns the company could be in danger of going bankrupt.

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The company's profitability did not fare much better, scoring a 4 out of 10 rating. While the operating margin outperforms over half of its competitors, Perspecta's returns are negative and underperform a majority of industry peers. It also has a moderate Piotroski F-Score of 4, which implies business conditions are stable.

With a 7.4% stake, Jana is Perspecta's largest guru shareholder. Steven Cohen (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Chuck Royce (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) also have positions in the stock.

Portfolio composition

As of the three months ended June 30, Jana had 35.84% of its $1.07 billion equity portfolio, which consisted of nine stocks, invested in the consumer defensive sector. Technology had the second-largest representation at 20.42%, followed by the consumer cyclical space at 16.66%.

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The firm's top five holdings as of the end of the second quarter were Conagra Brands Inc. (NYSE:CAG), Perspecta, the SPDR S&P 500 exchange-traded fund (SPY), Callaway Golf Co. (NYSE:ELY) and Hillenbrand Inc. (NYSE:HI).

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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