Turnarounds That Haven't Turned Around: Bearingpoint (BE)

Bearingpoint, Inc. (NYSE:BE) is another provider of IT services whose stock has changed its name to "the good, the bad, and the ugly."  It is in the same boat as Unisys which we just covered, although it doesn’t have as long of an operating history as an independent player and Bearingpoint has never really had any great hay-day in the sun.  This is the old KPMG Consulting that was spun off from KPMG and named Bearingpoint.

It offers a variety of IT consulting services to large and medium-sized businesses, as well as to government agencies and other enterprises.  Harry You was recently replaced as CEO (from 2005) just a couple weeks ago, although Ed Harbach is the replacement and he was already President & COO.  This may just be a consolidation of the leadership and some are obviously not going along with the notion that major changes are coming. 

But this is a possible turnaround stock now that has never turned around, particularly since it has a quasi-new head.  At the Value Investing Congress we noted how one key fund manager noted this still being one of her value picks in the space, although she was frank about the call being a loss so far and that there is a lot more work that has to be done here.

Bearingpoint has a $534 million market cap and it also trades at paltry valuation multiples compared to its more profitable peers for more than obvious reasons.  At $2.57 it is only 1% or 2% off of 52-week lows.  The 52-week trading range is $2.53 to $8.56, and this traded over $20.00 when it first came public in early 2001.  In September 2002 this became a single-digit priced stock and that has been the case for almost the entire time since.

We see its inverted balance sheet when using tangible assets to liabilities as a problem and at some point you have to wonder how solid and strong its government contracts are because of its financial position (although we openly admit that is just conjecture and observation).  Analysts are looking for a huge loss this year but looking for a break-even next year with a huge range above and below for next year.  So we are treating 2008 as a total wild card and aren’t even using the estimates because of the broad range.  Since the company posted a much wider loss than expected last quarter, analysts and investors threw in the towel.  Citigroup had this one on a tech buyout candidate list earlier this year, although that may behind it now.

This IT-outsourcing is not a temporary event, it is secular. Unfortunately, this new CEO is going to have to make some tough decisions to get this one back in the black.  That is what solid turnaround managers are supposed to do.   

This one has been too tough to cover with any great objectivity but it has been routinely screened for special situation newsletters and also for the "10 Stocks Under $10" weekly newsletter.

Jon C. Ogg
December 18, 2007

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