DXC Technology (DXC, Financial) (Q3: -46%, YTD: -44%) was one of the Fund’s top detractors (among our long positions) in both periods. DXC is a business in transition from traditional IT outsourcing arrangements to helping clients migrate their IT infrastructure, software and business processes to modern cloud architectures. Revenue is shrinking as the new digital migration business has not yet reached sufficient volume to offset the declines in legacy contracts. Adding insult to investors’ injuries, management has been unable to accurately forecast when the business will return to organic growth. After a thorough re-underwriting of our investment, we have materially lowered several of our key modeling assumptions, resulting in a lower business value estimate. Even after these negative revisions, DXC shares trade at a mid-single-digit multiple of expected earnings and free cash flow. Put simply, the shares seem priced for nothing to go right. In our experience, when expectations are this low, even a modest improvement (which we expect) can lead to a positive rerating of the stock.
From Wallace Weitz (Trades, Portfolio)'s Partners III Opportunity Fund third-quarter 2019 commentary.
