DJIA 8519.23 +13.38 (+0.16%) S&P 500 1069.92 +5.99 (+0.56%) Nasdaq 1674.75 +35.56 (+2.17%) Value Line ndx 818.35 +4.91 (+0.60%) 30-Year Bond 106 18/32 unch 5.07% Yield
Diverting some attention from the historic antitrust case brought against it by the Justice Department and 20 states, Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> crushed the analysts' mean estimate by reporting fiscal first quarter earnings of $0.56 a share, up 55.6% from $0.36 in the same quarter a year ago. The consensus on Wall Street was EPS of $0.49, with estimates ranging from $0.47 to $0.51. Revenues for the quarter increased 26% to $3.95 billion year over year, driven by strong demand for Windows 98 in Japan and several European countries. The world's largest software maker's CFO Greg Maffei also said fiscal second quarter earnings should be "at least a nickel a share" ahead of current expectations of $0.52. Although he anticipates that fiscal 1999 revenues likely will be lower than fiscal 1998, Maffei said revenues should grow sequentially in the next three quarters from the just-reported figure of $3.95 billion. Microsoft rose $6 3/16 to $106 7/16.
Investors jumped for joy today after homebuilder Kaufman & Broad <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KBH)") else Response.Write("(NYSE: KBH)") end if %> announced plans to buy privately held Lewis Homes for $544 million in cash, stock, and assumed debt after yesterday's close. The announcement nailed down a 14% gain for Kaufman, which was up $3 5/16 to $26 15/16. The acquisition is expected to add about 4,000 homes to Kaufman's 1999 deliveries figure, bringing company projections to more than 21,000 units for 1999. That would far exceed the roughly 15,000 units expected by chief competitor Pulte Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHM)") else Response.Write("(NYSE: PHM)") end if %>, according to Kaufman & Broad CEO Bruce Karatz. Pulte slipped $3/8 to $24 1/2 today despite yesterday reporting Q3 EPS of $0.64, which beat Street estimates by $0.02 on strong demand and improved operating performance. Kaufman & Broad sees the Lewis deal as "strongly accretive" to 1999 EPS, currently pegged at $2.74. Karatz, who described his company's acquisition strategy as "disciplined and focused" in a conference call yesterday, said not to rule out further acquisitions. He added that he expects a strong fourth quarter.
QUICK TAKES: Consumer products maker Rubbermaid <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBD)") else Response.Write("(NYSE: RBD)") end if %> shot up $6 1/8, or 23.7%, to $32 after agreeing to be acquired by hardware, home furnishings, housewares, and office products manufacturer Newell Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWL)") else Response.Write("(NYSE: NWL)") end if %> in a $5.8 billion stock swap. Newell dropped $5 13/16 to $43 1/4... Computing giant IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> added $4 13/16 to $142 11/16 after topping analysts' expectations of $1.53 per share with Q3 EPS of $1.56, up from $1.35 a year ago, even though Big Blue was cautious about Q4, citing global economic uncertainty and continued price pressures in semiconductors... Spyglass Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPYG)") else Response.Write("(Nasdaq: SPYG)") end if %> jumped $1 3/16 to $12 7/8 after announcing that cable systems and hardware provider General Instrument <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %> bought 700,000 shares -- a 5% stake -- in the maker of Internet software. Spyglass also reported a fiscal Q4 loss of $0.04 per share, an improvement over last year's loss of $0.38 and in line with estimates.
Embedded computer components manufacturer SBS Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBSE)") else Response.Write("(Nasdaq: SBSE)") end if %> soared $2 3/16 to $13 1/16 after reporting a 21% gain in EPS to $0.47 (before charges) from $0.39, beating the Street by a penny... Specialty components and tooling systems maker Kaynar Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTIC)") else Response.Write("(Nasdaq: KTIC)") end if %> surged $3 3/16, or 34.5%, to $12 7/16 after announcing it has hired Impala Partners to advise on "strategic alternatives... to maximize shareholder value," usually a tip that a company is for sale... Computer, office, and industrial products direct marketer Global Directmail <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GML)") else Response.Write("(NYSE: GML)") end if %> rocketed $3 to $15 3/8 after reporting Q3 EPS of $0.26 per share, beating Wall Street's estimate by $0.05 on successful marketing and improved operating efficiency. The company also extended its stock buyback plan to 4.35 million shares, or about 11% of the total outstanding.
PolyGram NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLG)") else Response.Write("(NYSE: PLG)") end if %>, the world's largest music company, hummed ahead $2 9/16 to $58 3/16 after reporting Q3 EPS of $0.45, up from $0.24 last year, due to "stronger international and local releases, lower marketing costs, and the continued benefits of the restructuring program implemented in 1997"... Business software developer Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> moved up $2 3/8 to $38 7/8 after its board okayed a buyback of nearly 36.9 million shares of stock, or about 6.7% of the 550 million outstanding. The firm also reported fiscal Q2 EPS of $0.52, $0.04 better than Street projections... Auto components, electrical controls, and network technologies company SPX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPW)") else Response.Write("(NYSE: SPW)") end if %> rose $3 13/16 to $43 after saying it is "confident" in its earnings guidance of $4.85 per share for 1999.
Heating, cooling, and refrigeration products maker York International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: YRK)") else Response.Write("(NYSE: YRK)") end if %> gained $2 5/8 to $33 13/16 after saying it is "positive" about the outlook for U.S. markets through 1999 and reporting Q3 EPS of $1.16 late yesterday, leaving last year's $0.55 figure in the cold and positively cooking Wall Street's $0.85 consensus estimate... Food service and industrial and consumer products manufacturer Standex International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SXI)") else Response.Write("(NYSE: SXI)") end if %> climbed $2 1/4 to $23 after CEO Edward Trainor said the company expects "a strong fiscal year 1999." Standex reported Q1 EPS of $0.61, up from $0.58 a year ago... Policy Management Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PMS)") else Response.Write("(NYSE: PMS)") end if %> added $3 11/16 to $42 1/16 after Morgan Stanley Dean Witter upgraded the enterprise and e-commerce application software developer to "outperform" from "neutral."
Immunodiagnostic test kit manufacturer Diagnostic Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DP)") else Response.Write("(NYSE: DP)") end if %> rose $1 13/16 to $22 3/4 after reporting Q3 EPS of $0.39, up from $0.37 a year ago. The company said it is "on track" to achieve its target of 300 shipments of its Immulite test kits... Eye care product maker Allergan Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGN)") else Response.Write("(NYSE: AGN)") end if %> popped up $2 15/16 to $60 3/16 after saying a warning letter from the FDA, reports of which hurt the stock in yesterday's trading, hasn't affected production or product availability. It also reported a Q3 loss of $2.51 a share versus a loss of $7.84 last year... Wireless and moblie information systems developer Telxon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLXN)") else Response.Write("(Nasdaq: TLXN)") end if %> jumped $2 25/32 to $19 9/32 after saying it is "confident" in its ability to meet its operating and financial goals for the second half of 1999 and reporting fiscal Q2 EPS of $0.22, meeting market expectations.
Envoy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENVY)") else Response.Write("(Nasdaq: ENVY)") end if %>, which provides electronic data interchange and transaction processing services, moved up $3 3/4 to $26 3/8 after reporting Q3 EPS of $0.24, topping analysts' mean estimate of $0.28... Commercial bank holding company Foothill Independent Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FOOT)") else Response.Write("(Nasdaq: FOOT)") end if %> stepped up $1 1/2 to $12 1/4 after announcing plans to repurchase up to 300,000 of its common shares, or 5% of its current shares outstanding... Online auctioneer EBay Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> bid up $4 1/16 to $50 9/16 after Goldman Sachs placed it on its "recommended list" and BT Alex. Brown gave it a "buy" rating... Computer and electronics retailer Tandy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAN)") else Response.Write("(NYSE: TAN)") end if %> rose $2 to $48 13/16 after it said it was "optimistic that the fourth quarter will come in as planned." It also reported Q3 EPS of $0.45, a penny ahead of estimates.
Earnings Movers
Checkfree Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CKFR)") else Response.Write("(Nasdaq: CKFR)") end if %>, up $2 7/8 to $14 3/8; Q1 EPS: loss of $0.05 (before charges) vs. loss of $0.06 last year; Estimate: $0.05
Eli Lilly & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> up $2 5/8 to $78; Q3 EPS: $0.53 (before charges) vs. $0.40 last year; Estimate: $0.51
Franklin Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FSVB)") else Response.Write("(Nasdaq: FSVB)") end if %> up $1 1/2 to $9 5/8; Q3 EPS: $0.34 vs. $0.29 last year; Estimate: $0.25
Geon Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GON)") else Response.Write("(NYSE: GON)") end if %> up $1 3/4 to $20 1/16; Q3 EPS $0.26 vs. $0.45 (including a one-time tax benefit of $0.09) last year; Estimate: $0.22
Level One Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LEVL)") else Response.Write("(Nasdaq: LEVL)") end if %> up $1 3/4 to $25 1/4; Q3 EPS: $0.23 vs. $0.11 last year; Estimate: $0.21
MindSpring Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %> up $3 9/16 to $34 13/16; Q3 EPS: $0.15 vs. loss of $0.03 last year; Estimate: $0.11
Protocol Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCOL)") else Response.Write("(Nasdaq: PCOL)") end if %> up $1 1/8 to $7 7/8; Q3 EPS: $0.15 (before charges) vs. $0.15 last year; Estimate: $0.10
RealNetworks Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNWK)") else Response.Write("(Nasdaq: RNWK)") end if %> up $2 3/8 to $40 1/4; Q3 EPS: loss of $0.04 vs. loss of $0.09 last year; Estimate: loss of $0.07
St. Jude Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STJ)") else Response.Write("(NYSE: STJ)") end if %> up $2 to $25 5/8; Q3 EPS: $0.35 vs. $0.20 last year; Estimate: $0.34
Arts and crafts retailer Michaels Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MIKE)") else Response.Write("(Nasdaq: MIKE)") end if %> slipped $5 1/4 to $18 after saying it expects same-store sales in October to be down 2% to 3% from last year's levels, resulting in "flat to slightly positive" year-over-year same-store sales figures for fiscal Q3. While the company said it expects a "great" holiday selling season, it also noted that sales of basic merchandise have slowed recently. Elsewhere in the crafts and home decor world, Garden Ridge Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GRDG)") else Response.Write("(Nasdaq: GRDG)") end if %> slid $1 7/8 to $6 5/8 after saying soft demand and lower customer traffic will result in a fiscal Q3 loss between $800,000 and $1.1 million. The bad news stoked fears that a slowing economy will hamper retailers' financial results down the road, as more consumers keep their wallets in their pockets. A.C. Moore Arts & Crafts <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACMR)") else Response.Write("(Nasdaq: ACMR)") end if %> fell $1 5/8 to $7 5/8 in sympathy.
Electronic design automation (EDA) tools developer Cadence Design Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDN)") else Response.Write("(NYSE: CDN)") end if %> slid $3 5/16 to $20 7/8 after reporting Q3 EPS of $0.29 (excluding charges) versus $0.24 last year, which was in line with analysts' estimates. Total revenues increased 31% in the quarter to $308.6 million, on the backs of a 28% increase in software product sales from a year ago and a 68% year-over-year revenue jump from its services business. However, Cadence's management seemed less than enthused by the results. "Although our services business showed strong growth, it did not meet management's expectations," the firm said in a press release. Apparently, the results didn't meet some analysts' expectations either, as both Needham & Co. and SG Cowen lowered their ratings on the firm today.
QUICK CUTS: Online PC software and hardware vendor Egghead.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %> was fried for a $1 3/16 loss to $6 1/8 after reporting a fiscal Q2 loss of $0.30 per share compared to a $0.24 per share loss a year ago... Computerized plant maintenance and efficiency systems developer Datastream Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSTM)") else Response.Write("(Nasdaq: DSTM)") end if %> was washed away today, losing $4 1/8 to $10 after reporting Q3 EPS of $0.20 (excluding acquisition-related charges) versus $0.15 a year ago, which was in line with the Street's mean estimate. However, Hambrecht & Quist lowered its rating on the firm to "buy" from "strong buy"... Small appliance manufacturer Sunbeam Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %> gave back $15/16 to $6 3/4 after rising 22% yesterday following the formal restatement of its financial statements for fiscal 1997 and the first quarter of fiscal 1998.
Oil and natural gas production and exploration firm Anadarko Petroleum Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APC)") else Response.Write("(NYSE: APC)") end if %> was drilled for a $5 1/8 loss to $33 7/8 after reducing its production estimates for 1998, 1999, and 2000 by 9%, 16%, and 28% from its prior forecasts due in part to lower-than-expected oil prices. Morgan Stanley Dean Witter downgraded the company to "neutral" from "strong buy"... Chip and computer disk metrology and inspection systems designer ADE Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADEX)") else Response.Write("(Nasdaq: ADEX)") end if %> sank $3/4 to $8 1/4 after saying a slowdown in orders will result in a fiscal Q2 loss between $0.55 and $0.65 per share, missing analysts' estimates for a loss of $0.17 per share... Titanium mill and sponge products supplier Titanium Metals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIE)") else Response.Write("(NYSE: TIE)") end if %> lost $3 1/2 to $10 3/16 after reporting Q3 EPS of $0.50 yesterday, down $0.14 from a year ago and $0.16 short of analysts' expectations.
Men's apparel retailer K&G Men's Center <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MENS)") else Response.Write("(Nasdaq: MENS)") end if %> was ripped $2 9/16 to $7 5/16 after saying its Q3 EPS will come in between $0.08 and $0.10, missing the Street's mean estimate of $0.13... HMT Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMTT)") else Response.Write("(Nasdaq: HMTT)") end if %>, which makes thin film disks for computer disk drives, was spun for a $7/16 loss to $6 13/16 after reporting fiscal Q2 EPS of $ 0.01 versus $0.03 last year, which was $0.07 short of the First Call mean estimate... Electronic forms automation products firm JetForm Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORMF)") else Response.Write("(Nasdaq: FORMF)") end if %> dropped $2 3/4 to $14. In a statement, the company said it that it is "not aware of any corporate developments" to explain today's share drop.
Paperboard packaging and auto parts manufacturer Tenneco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEN)") else Response.Write("(NYSE: TEN)") end if %> was shredded $2 3/16 to $31 5/8 after reporting Q3 EPS (excluding a gain) of $0.56 compared with $0.62 last year and the First Call mean estimate of $0.64. The company also said it will cut 1,000 jobs as part of its ongoing cost-cutting program... Chemicals and life sciences company DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> dropped $2 3/16 to $62 after reporting Q3 earnings (including discontinued operations) of $0.67 per share, which was in line with analysts' expectations. Excluding the discontinued operations, EPS came in at $0.53... Freight railroad and mutual fund operator Kansas City Southern Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KSU)") else Response.Write("(NYSE: KSU)") end if %> lost $1 9/16 to $35 1/16 after saying it will delay the planned spin-off of its Janus and Berger mutual fund unit after realizing that the IRS probably is not going to issue a favorable tax ruling for the transaction.
Oil production and exploration firm Texaco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TX)") else Response.Write("(NYSE: TX)") end if %> slid $2 3/4 to $58 5/8 after reporting Q3 EPS of $0.38, missing the Street's mean estimate of $0.43. The company blamed the shortfall on low oil prices and economic instability in some of its markets... Mutual fund giant and Cash-King portfolio holding T. Rowe Price Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TROW)") else Response.Write("(Nasdaq: TROW)") end if %> slipped $2 3/16 to $32 1/8 following a downgrade from CIBC Oppenheimer to "hold" from "strong buy"... The American depositary shares of Swedish automaker Volvo AB <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VOLVY)") else Response.Write("(Nasdaq: VOLVY)") end if %> skidded $2 3/4 to $21 3/8 after the company reported Q3 earnings below analysts' estimates due to higher charges from the Asian financial crisis and expenses from launching its new S80 car.
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
JDA Software and the ERP Washout
The carnage lately among enterprise resource planning (ERP) and related software companies has been breathtaking. Among the leading ERP vendors, Germany-based SAP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %> has dropped 41% from its 52-week high hit just after its splashy American intro late this summer, while its California-based rival PeopleSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> has plunged 66% and Netherlands-based Baan <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAANF)") else Response.Write("(Nasdaq: BAANF)") end if %> has imploded for a 82% collapse. Smaller niche players have also been deeply wounded, including firms working the supply chain management space, which the ERP vendors seem determined to capture. i2 Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %> trades 68% off its 52-week high, while Manugistics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MANU)") else Response.Write("(Nasdaq: MANU)") end if %> has been manhandled for a 84% beating and JDA Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDAS)") else Response.Write("(Nasdaq: JDAS)") end if %> has been slashed 80%. So what's happened, and are there any bargains among these tech casualties?
The short answer to the first question is that earlier this year these stocks traded at exceptionally high P/E multiples, often even above the stunning 50% to 70% earnings growth rates many had delivered in recent years. A slowdown in high-margin software licensing revenue has caused earnings multiples to contract even as earnings projections have been cut. This is the double whammy that makes some short-sellers willing to venture into the treacherous arena of highflying tech stocks. While favorable sentiment drives these darlings ever higher, a shift in momentum can lead to a cascade-like washout.
Recent earnings announcements have only added to investors' anxieties. After the market closed yesterday, PeopleSoft reported Q3 earnings of $0.17 per share, up 55% versus $0.11 per share last year and in line with estimates. Yet the company said full year FY98 revenue would increase by just 60%, suggesting a continued drop-off in the current quarter given that revenue is up 71% year-to-date and 67% in Q3. What's worse, the company now expects FY99 revenue gains of just 25% to 35%, in line with the 30% growth in third quarter license fees, which were down from the 58% gain in software revenue seen in the first half of this year. Though that guidance may be conservative, management pointed to uncertainty over big-ticket capital spending, especially given some apparent diversion of information technology (IT) budgets to address the Y2K problem. Also, price-cutting by competitors has hurt profits, with fourth quarter operating margins expected at the low end of the company's 18% to 20% target range. A flurry of analyst downgrades pushed PeopleSoft down $6 to $19 3/4 for the day.
Meanwhile, industry leader SAP added fuel to the fire. Following the firm's preliminary report on October 9, the company's estimate-beating Q3 results came in as expected last night, with revenue up 43% to $1.2 billion and pre-tax profits up 50% to $221 million, or 53% excluding a one-time expense. While revenue growth has slowed from the 63% seen in Q1 and the 59% seen in Q2, sales to the Americas jumped 55% and sales to Europe, the Middle East, and Africa increased 50%. The real sore spot is Asia, where revenue plunged 20% mostly due to currency issues. However, SAP's management doesn't foresee a quick rebound in Japan.
It also expects "some moderation of demand due to year 2000 issues." As a result, the company guided investors to expect a 30% to 35% increase in pre-tax profits for FY98 on 40% sales growth. The problem is that this forecast implies Q4 sales could rise just 16%. That exasperated some analysts, who considered it so overly conservative as to constitute bad investor relations. "You really have to dig and do your own research," complained Credit Suisse First Boston analyst George Gilbert to TheStreet.com, in what are surely some of the Wisest words of the week given that that's what analysts are paid to do (or so we've been led to believe).
While concerns about Asia and a shift in IT spending due to the Y2K problem are weighing on these stocks, a report issued today by AMR Research Inc., a leading tracker of the ERP market, found that price pressures, particularly on sales to mid-market firms with annual revenues of $50 million to $500 million, may be the most significant issue facing ERP vendors. A September/October survey of 12 of the top 20 ERP companies traded on U.S. markets found that the average firm does 66% of its business with U.S. corporations, 22% with European companies, and just 9% with the Asia-Pacific region. Nearly all expect steady or increasing sales to the U.S. and Europe, with Europe looking a bit weaker than the U.S. Even more interesting, three-quarters of the firms surveyed said they were "seeing more deals because of Y2K," with one vendor claiming 25% of the deals "were closing faster" because of the issue.
Bruce Richardson, VP of research strategy, said AMR continues to forecast "solid growth in most parts of the enterprise applications market, including ERP, supply chain management, and customer relationship management" but that "the growth is not being shared by all vendors." While sales cycles have lengthened as companies make sure they're getting the best product functionality and service, AMR expects sales will remain strong even during economic downturns. This makes sense given that productivity gains and cost-cutting at Fortune 1000 companies have been partially driven by the adoption of such enterprise and supply chain software.
While SAP and PeopleSoft seem like inevitable winners in the coming consolidation of the overall enterprise space, getting a handle on product differences among industry players and tracking sales (which often come in a flurry -- or not -- at the end of a quarter) can be a challenge for individual investors. Indeed, trying to invest in this area often feels like an endeavor best left to Peter Lynch's lame brained Houndstooth. On the other hand, some of the niche players seem like potential takeover candidates at their current prices.
Consider JDA Software, a provider of enterprise software products and related services that help retailers track inventories and purchase orders. Its customer list includes the likes of Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>, Gucci <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GUC)") else Response.Write("(NYSE: GUC)") end if %>, CompUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %>, and Williams-Sonoma <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WSM)") else Response.Write("(NYSE: WSM)") end if %>. JDA's stock fell $5 1/4 to $7 3/4 yesterday after reporting its second straight quarter of disappointing results. While revenue jumped 64% to $38.9 million in Q3, net income increased just 19% and EPS (due to dilution from a follow-on offering last spring) came in at $0.17, up from last year's $0.16 but below estimates of $0.22. Overall license fees edged up just 23%, down from the already disappointing 29% increase in Q2. The problem was that international license fees plunged 40% after dropping 20% in Q2, due partly to vacant management positions in Europe. The only positives were that U.S. license fees increased 130% while services revenues soared by 95% and gross margins from services exceeded expectations by vaulting to 36% from 31% in Q2.
The major ERP vendors have all targeted the retail market for growth. While retailers such as Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> have traditionally devised their own systems, manufacturers increasingly want retailers connected to their systems. That's driving sales of packaged applications in what is said to be a $3 billion market. SAP just this week acquired Campbell Software, a maker of workforce automation software for the retail market. Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> is collaborating with Richter Systems, while PeopleSoft recently paid $45 million to acquire longtime partner Intrepid, a maker of merchandise management software with $20 million in FY97 revenue. JDA has beefed up its own offerings by paying $44 million for Comshare's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSRE)") else Response.Write("(Nasdaq: CSRE)") end if %> Arthur line of decision support tools for retailers. And in August, JDA announced a joint venture with Baan to create and sell new global-retail software.
Baan has been rocked by accounting issues, charges of conflicts of interest among top management, and a sales slump -- none of which is reassuring for JDA investors thinking that Baan might find JDA's strong U.S presence of considerable value. Nonetheless, JDA may be a bargain, especially considering its 540 customers worldwide. Backing out the $86 million in cash from its roughly $187 million market cap gives us an enterprise value of $102 million, or 0.75 times the trailing 12-month sales of $136 million. That looks cheap considering JDA reported 10% net margins even in the weak third quarter. Meanwhile, trailing 12-month earnings stand at $0.76, giving the stock a P/E of 10.4 or just 5.7 after backing out the cash. Although analysts have cut their estimates substantially, Hambrecht & Quist, for example, still expects Q4 revenues of $41 million and EPS of $0.19. Although technology shipwrecks often have trouble rising from the depths, JDA is one of several bloodied software outfits working the enterprise space that looks worth investigating.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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