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SunTrust upgrades DXC Technology on smooth merger integration, spinoff upside

SunTrust Robinson Humphrey analyst Frank Atkins upgraded DXC Technology Co. to "buy" from "hold," citing a "more favorable" backdrop for core revenue growth and "smoother than expected" integration of Hewlett Packard Enterprises' assets.

The analyst said the management's approach has been "systematic and measured" in integrating two large people-oriented services companies, a task that can be risky. DXC was formed in 2017 after the merger of Computer Sciences Corp. and the Enterprise Services business of Hewlett Packard Enterprise.

Atkins expects a $1.05 billion payment to DXC from the U.S. public sector spin-off to result in a reduction in debt. The company is combining its U.S. public-sector business with Vencore Holding Corp. and KeyPoint Government Solutions to form a separate, independent publicly traded company.

The analyst said he is encouraged by the greater focus on cash flow generation, adding that the downside risk is "limited" as the stock is at a "substantial" discount to peer multiples.

He revised his price target to $115.00 from $100.00. He raised his EPS estimates to $7.57 from $7.56 for 2018 and to $8.75 from $8.59 for 2019.