climbed as much as 7% Tuesday as one analyst upgraded the stock and another raised estimates to reflect an acquisition that was completed Monday.
Mercury shares were up $2.45, or 6.1%, at $42.39 in recent heavier-than-normal trading. On Monday, the Sunnyvale, Calif.-based vendor of applications testing software announced it has completed its $225 million stock and cash acquisition of privately held Kintana, a vendor of IT resource management software.
In a note Tuesday, SoundView analyst Greg Kleiner said the Kintana acquisition and other recent moves have addressed his product-related concerns, which, combined with valuation, had initially prompted his hesitation on the stock. Kleiner upgraded his rating on Mercury to outperform from neutral. His firm hasn't done any banking with Mercury.
Kleiner noted that Kintana has been ringing in revenue of $12 million to $13 million a quarter. As a result, he raised his revenue estimates for the third quarter by $6.5 million, for the fourth quarter by $13 million and for the full year by $57.3 million. He raised his earnings estimate by a penny for the fourth quarter to 28 cents a share and increased his earnings estimate by 4 cents for the full year, bringing it to $1.20 a share.
"We are big fans of this acquisition as we feel it helps tie together the company's testing products with its application performance management products, thereby adding some substance to its business technology optimization aspirations," Kleiner wrote.
In addition, Kleiner said he believes he may have overestimated the near-term threat of
moving into the testing space, although it is a sector that is becoming increasingly competitive as well as mature at the high end.
Kleiner seemed to counter arguments that the stock is overvalued by noting it has underperformed the market since its second quarter results in mid-July. Shares are currently trading flat with mid-July prices, while the
is up about 3%. At roughly $40 -- slightly higher than current prices -- shares are trading at 42 times Kleiner's earnings estimate and 33 times his 2004 estimate.
"Yes, the stock is not cheap, but we do not mind paying up a little for a quality growth company," Kleiner wrote. "We would love to wait until the stock dipped into the high 30s, but do not want to outsmart ourselves."
Citigroup Smith Barney analyst Tom Berquist also raised his estimates on Mercury Tuesday to reflect the Kintana acquisition, but left unchanged his hold rating. Berquist raised his estimates for the remainder of 2003 by $20 million in revenue and earnings by a penny and upped his 2004 estimates by $55 million for revenue and 5 cents a share in earnings.
Berquist agreed that the Kintana acquisition is positive for Mercury, as it attempts to flesh out its business technology optimization vision. His firm hasn't done banking with Mercury.