Upgrade Lifts Mercury Interactive

The stock catches up with the spring tech rally.
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A pat on the back from Morgan Stanley has pushed shares of

Mercury Interactive

(MERQ)

to a new July high on heavy volume.

In recent trading on Tuesday, shares of the company, which specializes in software used in testing and application performance management, are up $1.65, or 4.3%, to $39.66.

Analyst Ross MacMillan upgraded Mercury to overweight, saying the stock again looks attractive. He summed up his reasoning in a note to clients: "Earnings and growth expectations have been reset by consensus, management have enacted a rapid sales force restructuring, valuation looks reasonable, the demand backdrop looks firm and Mercury remains a secular growth story in software."

MacMillan is somewhat more bullish on the stock than other analysts. He is forecasting earnings of $1.54 a share for fiscal 2005, compared with a consensus of $1.49 a share. Morgan Stanley has a recent investment banking relationship with Mercury.

The upgrade comes after a dismal first half for Mercury. Since the beginning of the year, the stock is off 17%; what's worse is it has not shared in the tech rally that started in mid-April. Since then (not including Tuesday's move) the stock has lost 11%, while the

Nasdaq

(NASDAQ)

has gained 14%.

The stock is now trading at 26 times expected 2005 earnings and 21 times 2006 earnings; since 2003, Mercury's valuation has ranged from 28 times to 62 times earnings

Earlier this month, the company warned that it will miss its second-quarter financial targets largely because of weak demand in Europe. It will report final results after the closing bell on Thursday.

The software company said it expects to earn 30 cents to 35 cents a share before items on sales of $200 million to $205 million. Analysts surveyed by Thomson First Call had been forecasting earnings of 36 cents a share on sales of $209.7 million.