A pair of sell-side analysts say the bonds of Electronic Data Services are well oversold in the wake of a drastic reduction in earnings guidance last month. "EDS is about the cheapest single-A we've got in the corporate bond market," says Mark Altherr at Credit Suisse First Boston. He says it is difficult for EDS' clients to look elsewhere for a company that provides similar services. While Altherr sees the prospect of a one or two notch downgrade, he says the bond market is treating the credit like a low triple-B. The 7.125% notes of '09 (A1/A+) were bid at 92 last Monday and have widened 350 basis points since it lowered earnings guidance on September 18. Altherr says the bonds will retrace at least 260 basis points over the next six months. "The bond market is saying this is an EDS problem that will get worse. We think it is a market problem with some EDS component to it, not a severe credit event."
Bear Stearns' Rao Aisola also focuses on EDS' ability to hold on to clients. He says customers pay a stiff penalty if they try to get out of a long-term contract. Aisola recommends a convertible issue: the zero-coupon notes of '21, because they are puttable in '03 and yield 9.77%--111 basis points more than the '09s. Aisola believes EDS has enough cash flow to pay the note holders when the put comes due. However, he argues that it should be able to provide bondholders with an incentive, if necessary, to extend the put.