Investors boosted shares of Serena Software ( SRNA) Friday after two analysts upgraded the stock following a solid second-quarter earnings report. Prudential Securities analyst John McPeake raised his rating on Serena, a small-cap software maker, to a buy from a hold, and Merrill Lynch analyst Peter Goldmacher upgraded his intermediate-term rating to buy from neutral after the company's second-quarter earnings report on Thursday. "Despite the challenges the software sector has endured over the past two years, Serena has not only remained profitable, but has consistently turned in some of the strongest operating margins in the group," Goldmacher said in a note. "We expect SRNA to continue to trade higher as investors look for quality names." Shares of Serena, which makes software to help manage changes in enterprise applications, shot up $4.12, or 40.5%, to $14.29 in recent trading.
Serena said it expects third-quarter revenue to range from $23.5 million to $24.5 million and third-quarter earnings of 16 cents to 17 cents a share. "We thought it was a surprisingly good quarter," said Sally Anderson, senior portfolio manager of the Kopp Emerging Growth Fund, of Edina, Minn., which has owned Serena shares since 1999. "I think quite frankly they are in a sector of the market that is faring reasonably well." Goldmacher agreed. "It enterprise change management software is core technology you need any time you are manipulating your environment, which is all the time," he said. "It's not recession-proof, but it's more recession-proof than some other areas of the market." In addition, Serena has offered a compelling valuation, particularly before Friday's run-up, both Goldmacher and McPeake said in their research notes. Based on Thursday's close of $11.25, Serena shares were trading at 13 times McPeake's 2004 earnings estimate. McPeake raised his price target to $16 from $15. from IBM is a penny on the bottom line" for Serena, Goldmacher said. Prudential hasn't done any banking with Serena, while Merrill Lynch has done banking business with the company in the past 12 months and expects to receive or intends to seek compensation for investment banking services from Serena in the next three months.