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In a sign that its valuation might be catching up to it,

BEA Systems

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suffered its third analyst downgrade in a week Thursday, although its shares defied the latest dose of bad news.

RBC Capital Markets analyst Sarah Mattson downgraded BEA to underperform from sector perform, following another downgrade to sell by Banc of America Securities Monday and a downgrade to in-line by Citigroup Smith Barney last week.

All three investment banking firms cited valuation in their rating changes. Shares of BEA are up nearly 30% since their summer low of $10.41 in late June. The

Nasdaq

is up only about 15% since then. BEA shares climbed 37 cents, or 2.6%, to $13.40 in trading Thursday.

In her research note, Mattson noted that BEA shares have surpassed her $12 price target, yet she sees limited upside potential to future results and therefore believes further appreciation will be difficult in the near term. Her target means BEA would be trading at 32 times her fiscal year 2005 earnings estimate, in line with her average P/E ratio of 33 times for the large enterprise software group of stocks she covers. RBC hasn't done any banking business with BEA.

Mattson also cited increased competition and unlikely margin expansion beyond her model for her downgrade. She said based on conversations at

Oracle's

(ORCL) - Get Oracle Corporation Report

OracleWorld conference this week, the company appears to be gaining traction in BEA's core application server market. BEA also faces

IBM

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at the high end and

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Microsoft

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,

JBoss

and

SAP

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at the midtier and lower ends of the market, Mattson noted.

In addition, BEA's recent foray into the integration market is sure to encounter stiff competition from IBM as well as pure-plays such as

Tibco

(TIBX)

and

webMethods

(WEBM)

.

Mattson said the stock's current value suggests investors are expecting the company to outperform this year and next. But she believes BEA's growing dependence on larger deals with existing customers and a decline in overall deals signal that it would be difficult for BEA to beat her revenue estimates, which peg October revenue at $248 million. Mattson is projecting earnings for the October quarter at 8 cents a share.

The consensus estimate gathered by Thomson First Call forecasts BEA will earn 8 cents a share on $251 million in revenue in the October quarter, which is BEA's third quarter.

Similarly, Banc of America Securities analyst Robert Stimson wrote in a note Monday that he doesn't believe incremental revenue from the company's new products in the integration sector will be enough to offset competition in the application server market. Stimson, who lowered his rating to sell from neutral, cut his price target to $12 from $13. At 38 times his calendar year 2004 earnings estimate, BEA is trading at a premium to peers, he noted.

Stimson also said deferred revenue declines over the past two quarters raise concerns that maintenance revenue growth may slow down. His firm expects to receive compensation for investment banking business with BEA in the next three months.

Of the three analysts who have recently downgraded BEA, Citigroup Smith Barney analyst Tom Berquist is the most bullish. Berquist, who has a $14 price target, cut his rating to in-line from outperform last Thursday due to the recent spike in share price. "We have not heard any incremental data points this week that would lead us to significantly increase numbers at this point," he wrote. But "BEA remains one of our favorites long term, as we believe that it is the best positioned company to capitalize on the trend towards Web-based computing."

Berquist said BEA's strategy of expanding its WebLogic application server platform to include integration, portals, development tools and security is "sound."

Another troubling signal not mentioned by analysts is recent insider selling. On Sept. 8, Co-Founder William Coleman, a member of the board of directors, sold 400,000 shares of BEA, bringing in $5.9 million. Unlike other recent sales by Coleman, this one was not conducted according to a pre-established sales plan designed to comply with insider trading rules. And on Sept. 3, Thomas Nielsen, executive vice president and chief marketing officer, exercised 30,000 options, reaping $291,000 in profit.