BMC Drops on Downgrades

Analysts see lower-than-expected growth in MIPS for the systems management software company.

Author:: Ronna Abramson
Publish date:: Apr 18, 2002 3:07 PM EDT

Shares of

BMC Software

(BMC)

dropped Thursday after two analysts downgraded the systems management software maker's stock.

Shares of Houston-based BMC fell $1.45, or 8.5%, to $15.65 in heavy trading.

Peter Goldmacher of Merrill Lynch downgraded BMC to buy from strong buy and reduced his price target to $20 from $25. John McPeake of Prudential Securities downgraded the company's rating to hold from buy and lowered his price target to $22 from $27. Both analysts cited lower-than-expected MIPS growth. MIPS are millions of instructions per second, a measure for computing power and prospects of mainframe-oriented software. About 40% to 50% of BMC's license sales come from the mainframe sector, Goldmacher said.

On Wednesday, bellwether

IBM

(IBM) - Get Report

also reported disappointing MIPS figures, with shipments down 4% year-over-year, McPeake said in a note. Prudential now believes MIPS shipments for 2002 are likely to be flat compared with 2001, vs. previous assumptions of 35% to 40% growth, with 10% going to replacement of retired capacity.

McPeake shaved his estimates for earnings in fiscal-year 2003, which ends in March, to 45 cents to 55 cents. He reduced his forecast for fiscal-year 2004 earnings to 55 cents from 65 cents. McPeake's firm hasn't done any banking with BMC.

MIPS growth is also proving softer than Merrill Lynch forecast, Goldmacher said. He reduced his earnings estimate for BMC for fiscal-year 2003 to 52 cents a share from 59 cents a share and pegged fiscal-year 2004 earnings at 66 cents a share. He forecast that sales would grow 6.5% in 2003 to $1.36 billion and 6.9% in 2004 to $1.45 billion. His firm has not done banking recently for BMC.

In his note, Goldmacher said channel checks show mainframe software contracts slated to expire in the coming quarters will be renewed, but they will be based on future needs that assume a decline in business. Still, Goldmacher said, "we expect the stock to appreciate 15% to 20% in the near term as mainframe software spending trickles in."

He said when BMC releases earnings May 6, he expects the company to issue an earnings target for fiscal-year 2003 in line with the consensus estimate of 51 cents a share. But that number appeared to drop by a penny Thursday to 50 cents a share, according to Multex.