Business Software Rebound: Not So Fast
Ronna Abramson
11/22/02 - 02:03 PM EST
Updated from 8:45 a.m. EST
Skepticism about a fourth-quarter turnaround led
Salomon to lower its investment rating on business
software makers
Siebel Systems and
PeopleSoft Friday.
The brokerage dropped both stocks to underperform
from in-line, saying fourth-quarter estimates for
license revenue are probably realistic and unlikely to
be exceeded. Salomon also doubted the companies would
raise estimates for fiscal 2003 and said they might
even lower them.
For PeopleSoft, Salomon lowered its estimate of
2003 revenue to $494 million from $533 million and
dropped its earnings estimate to 57 cents a share from
59 cents. It left its Siebel estimates unchanged.
In a note Friday, Salomon Smith Barney analyst
Heather Bellini noted that software companies'
experience last year could lead to conservative
estimates this year. Software companies got burned in
the first quarter of 2002 after concluding they
had seen a cyclical change in tech spending following
big gains in the fourth quarter of 2001.
In hindsight, Bellini noted, last year's fourth-quarter rise was
an anomaly, caused in part by delayed spending following
Sept. 11.
"Given this experience is still fresh in CEO/CFO
minds, we believe it is likely they err on the side of
caution regarding 1Q03 license revenue expectations,"
Bellini predicted. (Salomon expects to receive or
intends to seek compensation for investment banking
services from PeopleSoft within the next three months.
The company hasn't done banking with Siebel.)
Bellini said she believes market multiples are
pricing in larger license-revenue growth rates than
the current consensus estimate for the fourth quarter,
which projects a 6% sequential increase for PeopleSoft
and 10% sequential increase for Siebel.
She also believes the market is currently
expecting estimates to move higher for software
companies on their January conference calls, and
investors will be disappointed when
fiscal year 2003 estimates remain the same or drift
lower.
She noted, however, that the stocks could move
higher during the next four to five weeks because of a
disconnect between valuations and fundamentals and
recommends taking advantage of such rises to sell
shares.
Since Oct. 7, PeopleSoft has climbed more than
74%, while Siebel has moved up 57%, Bellini noted.
Based on Thursday's close, PeopleSoft was trading at
about 35 times 2003 earnings estimates, while Siebel
was trading at nearly 38 times 2003 earnings
estimates.
Despite that relatively high multiple for Siebel,
another analyst, Richard Davis of Needham & Co.,
initiated coverage on Siebel on Friday with a buy rating,
saying its stock price had finally become reasonably
valued for the first time in the past half-decade.
"We generally do not like to recommend software
stocks that trade significantly above 20x forward
earnings unless we can either convincingly make the
case that earnings are cyclically depressed or the
firm is such a dominant entity in its segment that it
deserves special valuation treatment," Davis wrote in
his note. He believes both situations apply to Siebel.
Needham has not done any banking business with Siebel.
Davis projected Siebel revenue should grow from
11% to 16% through 2005, while earnings per share
should grow faster. He concluded investors should not
pay much more than $8.88 per share for Siebel.
Shares of Siebel declined 10 cents, or 1.2%, to
$8.57 in recent trading. Shares of PeopleSoft shed
$1.09, or 5.2%, to $19.94.
