After a week that saw at least a half dozen software companies report earnings shortfalls and their stock prices get sliced, some analysts and investors are sorting through the rubble looking for a bargain. A handful see
Software AG Systems
as just that.
The Reston, Va.-based software maker said Monday it expects to post first-quarter earnings of 16 cents to 18 cents per share, lower than the
consensus estimate of 21 cents per share and compared with the year-ago's 17 cents. It sees first-quarter net income of $5.1 million to $5.7 million, compared with $5.4 million last year. It also expects to report revenue of at least $53 million, compared with $55.8 million a year ago. The earnings are scheduled for release April 20.
That kind of news would normally bring on an onslaught of downgrades, but instead, it was greeted with an upgrade from
Salomon Smith Barney
analyst Neil Herman, whose firm hasn't performed underwriting for Software AG. Herman upgraded Software AG to buy from outperform based on valuation.
"The shares are trading only slightly above book value of $4 per share, of which $2.25 per share is cash," Herman says. At 1998's end, the company had about $71 million in cash and short-term investments on its balance sheet, nearly $100 million in receivables and about $80 million in deferred revenue. The strong balance sheet, coupled with his expectations that the company will generate more than $20 million in cash this year, makes the company extremely attractive, he says.
"We would expect the company, at a minimum, to launch a stock buyback program in the near future," he says.
Jeff Bernstein, portfolio manager at
Northstar Investment Management
, says a company like Software AG with a lot of cash "would be crazy not to buy back stock" while the stock price was down. (His firm doesn't hold the shares.) Software AG declined to comment on the issue.
When the company disclosed its earnings warning, the stock traded as low as 4 3/4. It has since recovered, closing Friday at 6 3/8, down 7/16. But the stock still has a price-to-earnings ratio of just over seven. It trades at about 1.6 times book value and well below 1 times revenue.
Steve Ellis, a Software AG spokesman, notes that while orders have slipped into later quarters, they haven't necessarily been canceled. He attributes the shifting orders to corporate spending being diverted to fix Year 2000 bugs. He believes those orders will eventually be filled, and earnings this year still will rise above last year's 87 cents per share.
The year's second half should be helped a bit by a new
product on schedule for a third-quarter launch. Sagavista will push Software AG into the enterprise integration application space, which helps companies link old, back-end mainframes and other technology to newer front-end applications like those needed to get on the Web.
Though buy-side analyst Jim Chen says his firm,
Roger Engemann & Associates
, has been out of Software AG stock since the start of the year, he admits that "it looks interesting down here, and we're looking at it for a longer-term investment." He figures the company is likely to rebound when Year 2000 fixes are complete and the company launches Sagavista.
Software AG "has a very good, unique niche that it can tap into with its new product," Chen says. If Software AG gets its new product out, he says the company's value could soar closer to other companies in enterprise integration applications. "Competitors like
are trading at 60 to 70 times
revenue," he notes.
Bernstein at Northstar Investment also notes that it's rare for a software company's stock to trade at such a low price-to-sales figure. Software companies generally can make at least 20% margins or much more, on their products, because once software is developed, it can be sold and distributed with relatively low cost.
"Grocery stores trade for less than 1 times sales, and they have margins of less than 1%," he says. "So we're talking about a company that can easily have margins in the high teens to twenties or even up to 40%, trading for as much as a grocery store."
Herman at Salomon Smith Barney says the company also could be an acquisition candidate. He believes a software company like Software AG would fit with a number of mainframe software companies like
. The company wouldn't comment on the idea of it being acquired.
"At some price, this stock has value, particularly given its great blue-chip customer base, the solid management team and the company's software code," Herman says. He's betting that price is closer to his $11 price target.