Analysts warmly recommend applications performance firm Mercury
Mercury Interactive's (Nasdaq:MERQ) Q1 2002 financials generated nostalgia for better days, and investment banks were quick to commend the company.
Mercury is one of our most highly recommended shares, said Robertson Stephens, Merrill Lynch, and Credit Suisse First Boston.
Investors apparently embraced the recommendations, evidenced by Mercury's 24.7% leap to $37 on April 12, attracting three times the average volume. Mercury hasn't climbed so high since the beginning of April.
On April 11 Mercury released its quarterly results, a good start for the new reports season of Israeli firms trading in New York. Mercury beat estimates with $90.5 million revenue, and 14 cents earnings per share.
Merrill Lynch analysts expect Mercury to continue performing impressively, and said that the company has never been as prominent or important as it is now.
The analysts explained that customers are looking for opportunities to decrease their information technology budget, and are looking for ways to get the maximum from existing systems. This is where Mercury comes in, the analysts said. The company addresses the demand for products that will aid quick return on investment and cutting expenses.
Although first quarter license sales dropped compared with the fourth quarter of 2001, demand for applications performance management products increased, as did Mercury's, ActiveTune, its new production-tuning product. The first quarter was the first full quarter of ActiveTune sales, which beat expectations. Investment banks regard it as one of the company's growth engines in coming months.
CSFB estimates that ActiveTune reflects opportunities for Mercury in markets beyond its traditional performance testing market, estimated at $1 billion. The assumption is based on several agreements signed in the first quarter, incorporating performance management system Topaz product suite, and ActiveTune. CSFB estimates that in the course of 2002 Mercury will penetrate a bigger market than the application testing market, and that it will become a dominant market player.
CSFB has raised its estimates for 2002 to $400 million sales, and 70 cents EPS, compared with a previous estimate of $390 million sales and 67 EPS.
Mercury's own projections for 2002 remain unchanged. It expects revenue of $380 million to $415 million, and 60 cents EPS. In the second quarter revenue is expected to come to $91 million to $96 million, and 14 cents to 16 cents per share net profit.
CSFB reiterates its Strong Buy rating, setting a $43 price target. The investment bank added that its estimates could turn out to be conservative.
Like CSFB, also Merrill Lynch was strongly impressed by Mercury's financial results. The investment bank left its Buy rating unchanged, estimating the share price could rise to $40. Merrill Lynch recommended to investors with 12 to 18 month investment plans to acquire Mercury shares.
Robertson Stephens reiterated its Buy rating, setting a $38 price target, but noted several risks. It estimates that the drop in license sales could continue should the slowdown in the applications development market continue. This market accounts for 65% of Mercury's test products sales.
In addition, Mercury's entry into the performance management market pits it against heavyweight companies such as BMC, Computer Associates (NYSE:CA), and the Tivoli division of IBM Corporation (NYSE:IBM). Each of these controls a wider market segment than Mercury, and has a bigger customer base. Another risk relates to the ongoing slowdown in the software market.
Accordingly, Robertson Stephens lowered its 2002 projections slightly to $403 million revenue, compared with a previous estimate of $409 million. EPS is expected to come to 66 cents, compared with the previous estimate of 69 cents. The investment bank recommended making the best of any additional weakness in Mercury shares, in order to go on acquiring shares.
