With tech stocks hurtling back to Earth after the late-1990s moon shot, it's possible that a rare phenomenon has re-entered the investing atmosphere: the tech stock as value play.
|The BMC Software File |
|Business: Makes software for mainframes and Internet applications. |
|FY 2000 Revenue: |
|FY 2000 Earnings |
Per Share: $1.76
|FY 2001 Estimated |
Revenue Growth: 2.3%
|FY 2001 Estimate |
Earnings Growth: -54%
|Stock Snapshot |
|Share Price: $18.53 at Tuesday's close. |
|52-Week Range: |
$ 86.625 - $13
|Percentage Change from Jan. 1: Down 76.8% |
|Shares Outstanding: |
|Analysts' Average 12-Month Share Price Target: $22.80 |
|Source: Baseline, Zachs, Morningstar, BulldogResearch.com. |
Does beaten-down BMC Software (BMCS), which has fallen from grace after the Y2K sales hangover, meet the criteria? That's the question for TheStreet.com's inaugural Gut Check, a feature that checks the sentiments of fund managers and analysts about where they think one particular stock is heading -- and whether investors should buy, sell or hold.
The tech swoon has left many casualties, and BMC Software -- whose stock is off 76.8% this year -- is among them. But given the company's history of strong growth and light debt load, the stock has gotten some attention as a safe, inexpensive bet in the volatile tech sector (Bloomberg Personal Finance recently cited BMC as a "tech stock even Warren Buffett would love"). While this has led some value and tech managers to jump in recently, many of these folks don't expect miracles in the short term, because much of BMC's future sales are tethered to the delayed rollout of IBM's (IBM) next-generation mainframe.
The upshot: BMC looks like a sturdy long-term bet, the pros say. But many fund managers gave up near-term hope on the stock this year. For the stock to recover, BMC's mainframe software sales have to improve and the company will have to continue to expand into distributed client/server and Internet software, portfolio managers and analysts say. And even if BMC succeeds at this, the weakness in the technology sector could pull the stock down further for now, says Glen Frey, portfolio manager of the (OITAX)
Orbitex Info-Tech & Communications fund, which owns a piece of BMC.
|Post Y2K Blues |
BMC has fallen out of favor with fund managers this tough year.
|Date ||Number of Domestic Funds Owning BMC ||Percentage of Funds Owning BMC |
|Jan. 1 ||410 out of 2662 ||15.4% |
|Oct. 31 ||276 out of 2864 ||9.6% |
|Source: Morningstar. |
"The catalysts that will lift the clouds on the stock are not immediate," adds Kent Shepherd, a vice president and portfolio manager with Franklin Advisors
. Shepherd owns BMC in two funds that he manages, the Franklin VIP Large Cap Growth Fund and Luxembourg-based SICAV Franklin U.S. Equity Fund.
The big push that experts expect from BMC in the next six months is upgrades to BMC mainframe software to accommodate the IBM G7 next-generation mainframe.
BMC's mainframe software sales were strong all of last year through the first quarter of 2000, due to the mad rush to test software in preparation for Y2K, analysts say. Now that Y2K has come and gone, the next big wave of BMC mainframe software sales is expected to come as a result of the new IBM G7 mainframe, just beginning to roll out now. But because it's purported to be 60% faster than current IBM mainframes -- at roughly half the price -- no one is buying any mainframes or mainframe software until the G7 arrives, says Robert Johnson, a managing director with ABN AMRO who follows BMC.
While BMC writes add-on software for other major mainframe manufacturers, including Compaq and Hewlett-Packard, it's the software that BMC has written for the IBM G7 that's got professional money managers recently interested in the stock, says Franklin's Shepherd.
The IBM G7, originally scheduled to hit the market this quarter, has been delayed until June 2001, which caused Johnson to recently knock his buy rating on BMC down a notch to add.
Joseph Bealieu, a senior analyst with Morningstar
who personally owns 100 shares in BMC, explains: "There's a great deal of uncertainty surrounding the G7 -- what software IBM will bundle with it, how IBM will price it and how quickly these things will ship."
That uncertainty hasn't help stanch the bleeding for BMC's stock, which closed Tuesday at $18.53, far from its 52-week high of $86.63.
The stock certainly had plenty of room to fall, considering that its worst performance in the five years before 2000 was a 35% return -- and the other four years were all 50%-plus returns, according to Morningstar. The fall from grace this year has a big silver lining, pros say: Its shrunken price-to-earnings multiple makes it an attractive buy at a time when even technology managers are looking for value stocks.
"We bought BMC in October, at 11 to 12 times 12-month trailing earnings," Shepherd says. "BMC historically has traded anywhere from 30 to 40 times earnings." BMC's price-to-earnings ratio
hovers at 15.3, according to Baseline. But Shepherd adds, "We will not double our money any time soon."
BMC's strong fundamentals are what attracted Shepherd and a number of other fund managers, including skippers at Putnam, Fidelity and Dreyfus funds. Despite recent weakness, BMC has a solid track record on sales and a strong customer base, portfolio managers and analysts say. (Its client roster includes Amazon.com (AMZN)
, Home Depot (HD)
, First Union (FTU)
and Dow Corning (DOW)
, according to a BMC spokesperson.) They also like the fact that BMC has no debt.
BMC's sales for the fiscal year 2000 ended March 31 rose 31% to $1.7 billion. But sales have tapered off this year in the post-Y2K landscape, declining 7% in the first quarter and 22% in the second.
The slowdown in sales has taken its toll on earnings. While the company delivered a five-year historical EPS growth rate of 25%, earnings are down 32% for the past 12 months, according to Baseline. Analysts expect BMC's earnings to decline 61% this fiscal year, according to Thomson Financial/First Call
But analysts expect BMC's fiscal year 2002 to witness a reversal of fortune, with earnings projected to increase 57%, according to Thomson Financial/First Call.
|True Believers |
These funds have made big commitments to BMC Software.
|Fund: ||Total % of Fund Assets: ||Date of Portfolio: |
|Dreyfus Midcap Value ||2.4% ||Sept. 30 |
|Orbitex Info-Tech & Communications ||2.25% ||July 31 |
|Calvert Social Investment Equity ||2.01% ||Sept. 30 |
|WM Growth & Income ||0.47% ||Sept. 30 |
|Putnam Vista A ||0.16% ||June 30 |
|Selling Out |
These funds have sold big stakes in BMC in recent months.
|Fund: ||Shares Sold: ||Date of Portfolio: |
|Putnam Voyager ||470,000 ||June 30 |
|Pioneer A ||100,000 ||Sept. 30 |
|Regions Growth || 25,000 ||June 30 |
|Vantagepoint Growth & Income || 22,000 ||Sept. 30 |
|Source: Morningstar. |
The big G7 push is not all that investors are expecting from BMC. Once nicknamed "Big Mainframe Computer" (but actually named for the three men who founded it 20 years ago), BMC has branched out beyond mainframes to offer software for the Internet and distributed computer systems, Bealieu says. BMC also recently came out with software to test the performance of other software, says Patrick Dryden, an analyst with Illuminata, a technology market research company in Nashua, N.H. Today, 55% of BMC sales come from mainframe software and 45% from Internet and distributed systems software, a BMC spokesperson says.
The fact that BMC is making a push into Internet and performance-management software should do a lot to improve the company's sales, Dryden says.
Shepherd expects the stock to improve by the second or third quarter of next year -- if both the BMC's IBM G7 mainframe software and its distributed and Internet software take off.
For all those portfolio managers buying up BMC software, there are several who have recently exited the stock. The portfolio manager of the Armada Equity Growth
fund unloaded the last of his BMC holdings in September. "We found that in BMC's case, there was a larger falloff in post-Y2K spending than anticipated," says Gene March, a vice president with National City Investment Management
, which is the subadvisor to the Armada Equity Growth fund. But now that BMC's price has decreased to the $19 range, March says he might again buy the stock. "As the tech sector has come back in price, we are reconsidering BMC," March says.
But one analyst believes BMC is up against more than these external sales challenges. Since acquiring a number of companies in the past three years, BMC has had trouble assimilating its sales force, says Darin Wyatt, an analyst with the Houston-based investment banking firm Sanders Morris Harris
. This has led to "a lot of turnover and internal struggle. I would like to see concrete evidence that BMC" has grappled with its internal issues, Wyatt says, before he would recommend investing in the stock.