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A new addition to our Value Leaders rankings this week, DXC Technology (DXC) is a relatively lesser-known IT services provider that was recently at the center of takeover discussions between Apollo (APO) and Kyndryl (KD), the company that IBM (IBM) spun off several years ago. DXC has encountered turbulence this year, sinking to around four-year lows in May following troubling FY25 (Mar) guidance, with EPS and revs falling considerably short of analyst expectations.

However, a new CEO, Raul Fernandez, was appointed in February to enact a major overhaul. Given his recent appointment, Q4 numbers were largely out of his hands. Since that dismal quarter, Mr. Fernandez's actions are already starting to bear fruit. Also, while takeover talks have cooled, they are not entirely off the table; APO and KD discussed acquisition at a high of $25.00 per share in June. Mr. Fernandez may opt to keep the company independent. However, he may also seek to extract more shareholder value by turning around operations before entertaining bids at a higher price.

• Beginning with the bad news, market uncertainty continues to produce cautious behavior from many of DXC's customers. This has restrained discretionary spending on short-term project work across the company's Global Business Services (GBS) and Global Infrastructure Services (GIS) segments. However, DXC forecasted this when initially outlining its FY25 outlook, helping to already ground investor expectations. In fact, conditions have unfolded better than DXC anticipated, fueling its slightly raised FY25 guidance in August.
• To squeeze as much out of the deflated demand environment as possible, Mr. Fernandez immediately revamped the company's go-to-market approach within its sales organizations. These moves included deploying dedicated client partners with expertise in certain industries, updating the compensation structure, and elevating incentives.
• Early success has branched from these efforts. DXC noted in August that its pipeline expanded nicely, driven by new deal inflows in its largest segment. The company added that within its pipeline, it noticed a greater mix of larger deals progressing to the later stages of the sales cycle. While these engagements will likely contribute less to near-term revenue, they fortify DXC's longer-term base.
• DXC's insurance software business remains a laggard, with revenue growth continuing to flatline. That is not to say this business is not lucrative; it generates over $1.0 bln in annual revs, boasting 21 of the top 25 global insurance carriers as customers. As such, this business seems more likely than a total takeover, at least in the short run. DXC commented in August that it is still exploring various strategic opportunities within its insurance business.

DXC is still operating in a dynamic market environment, which can produce elevated volatility over the near term. Future announcements surrounding M&A may also spur swings in the stock price. However, for buy-and-hold investors, DXC may be on the verge of a broader turnaround, especially after displaying encouraging signs last quarter. Meanwhile, the stock still trades at an attractive 7x forward earnings valuation. As always, a stop loss limit in the 15-20% is a good idea.