bucked the down market Monday after Banc of America Securities upgraded the stock to a buy for the first time in more than five years.
Banc of America Securities analyst Bob Austrian raised his rating to buy from neutral, citing an upcoming management meeting Sept. 4, product field checks and benefits from the
acquisition as catalysts. Austrian also said
hostile takeover bid for PeopleSoft has helped the company and suggested investors will benefit whether or not Oracle succeeds.
"We have been neutral on PSFT since our pre-Y2K downgrade in July 1998, but see 2H03 to get back in at last!" Austrian declared in his note Monday. His firm expects to receive or intends to seek compensation during the next three months for investment banking services from PeopleSoft and Oracle.
Austrian issued new post-J.D. Edwards acquisition estimates for PeopleSoft, raising 2004 earnings to 90 cents a share from 55 cents a share before the merger. He figured the company will realize cost savings of $171 million, near the midpoint of the company's guided range of $150 million to $200 million. Austrian ratcheted his price target on PeopleSoft to $26 from $16.
Austrian said field checks found that PeopleSoft is in the middle of integration sessions that map out the future of its products in greater detail than most investors likely expect.
"Revenue from cross-selling is far more likely to prove material in 2004-2005, given the tighter, more suite-like integration plans we expect PeopleSoft to articulate shortly," Austrian wrote. In addition to the Sept. 4 analyst day, the company will be holding a user meeting the week of Sept. 15 to highlight integration plans. "This should raise investor confidence in the PSFT-JDEC merger synergies considerably (particularly on the revenue side) and tend to reverse the great skepticism that the merger met with initially on Wall Street," Austrian said in the note.
Austrian said he believes initial integration of products from PeopleSoft and J.D. Edwards, which increases PeopleSoft's presence in the medium- and small-enterprise market, will be easier than current expectations. "In fact, several customers have already linked PeopleSoft HR (human resources) to J.D. Edwards' supply chain applications," Austrian wrote.
Although hostile, Oracle's bid for PeopleSoft has had a couple of positive side-effects on PeopleSoft, Austrian suggested. "With survival at stake, PSFT management will be under pressure to realize synergies," Austrian wrote. And "Oracle's acquisition bid has significantly enhanced PeopleSoft's mind share in the market, much more than what could be expected from an internal marketing effort."
Austrian gave Oracle's bid a 50% chance to clear regulatory hurdles, but like others, suggested Oracle could raise its offer to the low $20s to complete the deal. Currently at $19.50 a share, the bid would now yield a 15% return for PeopleSoft investors.
On the flip side, Austrian wrote, a "no-go" from regulators should cause only a minor and brief selloff, in any, in PeopleSoft shares.
Finally, Austrian called PeopleSoft's current valuation -- at 15 times his 2004 estimates excluding $3.84 a share in cash post-J.D. Edwards acquisition -- "compelling." The stock's current price-to-earnings ratio of 19 is also at a historic low, according to Austrian.
Shares of PeopleSoft climbed as high as $17.31 before settling back to $17.06, up 31 cents, or 1.9%, in recent trading. Shares of Oracle were up a penny at $12.30 in recent trading.