Deutsche Banc and Merrill Lynch concur that Mercury is a good long-term Buy opportunity

But it's share price is high. Investors should stay cool until the market situation clears up, analysts advise
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Merrill Lynch and Deutsche Banc concur that Mercury Interactive (Nasdaq:MERQ) is a good long-term buy opportunity. Meanwhile investors should wait for its share price to lose some ground, they say.

Mercury met the upper edge of its pre-announced results, as it announced yesterday. It also lowered expectations for the fourth quarter, predicting revenues of $86 million to $90 million, compared with an earlier estimate of $100 million.

Merrill Lynch affirms that Mercury is an industry leader slated for success, over time. It also reiterated its confidence in the company's management and noted its expansion to new markets.

But the bank downgraded Mercury to short-term Accumulate and lowered its forecasts for the fourth quarter to the bottom of the range the company predicts. For 2002, the bank affirmed its forecast of $397 million revenues and 70 cents earnings per share.

Its grounds for the downgrade are Mercury's share price, which is close to its high of the bubble days despite the earnings warning. For the long term, Merrill Lynch repeated its Buy rating for the stock.

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Contrary to Merrill Lynch's pessimism, Deutsche Banc elected instead to set its forecasts at the upper edge of Mercury's guidance. But then the bank had lowered its estimates for the fourth quarter and 2002 before Mercury published its warning.

Mercury's guidance is too conservative, Deutsche Banc wrote, concurring that it's a solid company simply going through some hard times, like the rest of the industry. The analysts noted that repeat orders from returning clients contributed a bigger proportion of business in the third quarter against previous quarters, rising to 18%.

Moreover, the company's core market, of inspection systems for data network applications, is far from saturated, Deutsche Banc wrote. If anything, the market is expanding toward inspection of real-time applications.

Also, sales of inspection systems for customer-management applications grew steeply to 30% of orders, compared with 20% in the previous quarter. Mercury believes it has tapped into only 10% of that market, indicating great growth potential.

Deutsche Banc also reiterated a long-term Buy rating for Mercury, but advises investors to stay cool for now until the situation of the market becomes clearer.