<DAILY DOUBLE>
Thursday, February 11, 1999
New Era of Networks, Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NEON)") else Response.Write("(Nasdaq: NEON)") end if %>
Phone: 303-694-3933
Website: http://www.neonsoft.com
Price (2/10/99): $53 1/4
HOW DID IT DOUBLE?
When choosing stocks to highlight in this feature, it's often most interesting to look at companies with absolutely stellar performances, not just those that have barely managed to double. One stock that has managed to double not only once, but three times over the past twelve months, is the software company New Era of Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NEON)") else Response.Write("(Nasdaq: NEON)") end if %>. Its performance is so outstanding that investors in New Era have found their stock worth almost ten times what it was worth a year ago.
One does not need to scratch too deep to find out why the stock has taken off recently. A look at the financial performance of the company over the past several quarters reveals a vibrantly growing company, and it should come as little surprise that the company's profits have gone the same way as New Era's stock -- up.
Q497 Q198 Q298 Q398 Q498
Revenue 8,272 9,582 11,460 17,463 27,309
Net Income* 591 842 1,463 2,683 4,610
EPS $0.03 $0.04 $0.07 $0.10 $0.15
Net Margin 7.1% 8.8% 12.8% 15.4% 16.9%
Figures in 000s except EPS.
*Excludes one-time charges and tax benefits
Making the company's performance that much more impressive, New Era managed to knock the cover off the ball this past quarter, earning $0.15 per share when analysts were calling for the company to earn only $0.08 a share. Nearly doubling estimates is almost always a sign of strength. Also adding fuel to the bull's fire was a recent 2-for-1 stock split and a successful secondary offering of stock that brought significant funds to the company. Combine all of these factors, and investors in New Era must be smiling ear-to-ear.
BUSINESS DESCRIPTION
Founded in 1993, New Era of Networks has quickly become one of the leaders in the Enterprise Application Integration (EAI) sector. The EAI market is one of the highest growth sectors of the wider networking software industry, expected to more than double in size over the next three years. The company also designs software for the financial services industry for use in managing customer information.
New Era's EAI products, for those who are wondering, are designed to integrate a wide variety of computer platforms and allow information to be shared and managed across an enterprise. One of the key uses of this technology, especially with the millennium bug on many minds, is upgrading computer systems, enabling data on older machines to be translated for use on newer systems. More importantly, New Era's software simply glues together vastly different hardware and software architectures, allowing them to work as one cohesive network.
New Era of Networks also has a major joint-marketing relationship with industry heavyweight and creator of numerous legacy systems, IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>.
FINANCIAL FACTS
Income Statement
12-month sales: $65.8 million
12-month income: $9.6 million *
12-month EPS: $0.36 *
Profit Margin: 14.6%
Market Cap: $1615.1 million
(*Excludes charges for in-process research and other one-time charges)
Balance Sheet
Cash: $174.2 million
Current Assets: $218.8 million
Current Liabilities: $22.9 million
Long-term Debt: none
Ratios
Price-to-earnings: 147.9
Price-to-sales: 24.5
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Running a screen for stocks with rising revenue, net income, and margins would have shown New Era blinking as bright as a neon buy signal. If one thought the sequential sales and profit improvement was a fluke early last year, it should have been apparent that the company was for real when the sales and profit growth continued to climb and accelerate through the year. It's amazing that the sequential revenue growth between the third and fourth quarters was actually higher than the total sales the company booked in the entire first quarter.
Another screen that would have worked is the beat estimates screen at the Motley Fool. In each of the last five quarters, New Era has managed to nearly double the published estimates -- no small feat. Surely part of the blame should go the way of the analysts for underestimating the company, but a portion of the beating is courtesy of New Era hitting on all cylinders.
WHERE TO FROM HERE?
There is little doubt that New Era is on a roll, and postulating continued growth appears to be a safe prediction. One of the major benefits the company has is that its market is simply exploding. According to the Gartner Group, the market for software solutions for computer integration is expected to grow from 1995's $420 million to a whopping $3 billion in the year 2000. Allowing older computer systems and data to network with newer systems is an important and emerging industry that should continue to show vibrant growth long after the spending spree for the Y2K problem slows.
Furthermore, the company's balance sheet is as clean as they come, with essentially no debt -- always a good sign. In addition, New Era is flush with cash available for future use. Not all of the recent growth has been organic, and the company has purchased several smaller firms over the past year to give breadth as well as depth to its product line. With nearly $175 million in the bank and its stock flying high, it wouldn't be surprising to find New Era continuing its buying spree by acquiring another company or two down the road.
Even though the fundamental business outlook and balance sheet both appear quite healthy, it's downright difficult to call a company "cheap" that's trading at 147x trailing earnings and over 24x sales. But, if the company can maintain its robust growth through the year, these relatively high valuations will shrink quickly. Buying at such stratospheric levels certainly raises the risk an investor takes on, but the returns could continue to be quite dramatic if New Era can maintain its current rate of growth. At a minimum, this is a company worth keeping on the radar.
-- Paul Larson
([email protected])