2HRS2GO: Storage management plays in Legato
By Sergio G. Non
April 20, 1999 1:53pm
ZDII
Perhaps Legato Systems Inc. (Nasdaq: LGTO) is reversing the Wall Street cliche: people buying on the news today after selling for months on the speculation.
Legato makes software that corporations use for backing up data, recovering from data disasters and performing other "enterprise storage management" tasks. And after watching its stock price drop by more than half since the start of the year, the company is seeing its shares up 3 1/4 to 33 1/4 in mid-afternoon trading, following Legato's announcement that it has completed the acquisition of FullTime Software.
To anyone with a personality, storage management technology is about as interesting as cement. But when you're talking money, who needs flair? Revived investor interest is overdue for Legato, one of the leaders in an expanding market. Even with today's rise, the stock price remains at roughly 30 times estimated 1999 earnings -- relatively cheap for any rapidly growing technology company nowadays, and certainly a comparative bargain in the storage management field, where stocks such as Veritas Software Co. (Nasdaq: VRTS) trade at P-E ratios of 60.
"The irony here is that analysts have the same set of (earnings) estimates on both companies, and there's a gap of 30 points between the two," says Joe Payne, analyst with Hoak, Breedlove & Wesneski. "The market doesn't let those things continue for very long."
That 30-point gap was created this year on fears that Legato would lose ground to Veritas because of the latter's pending acquisition of Seagate Software. Those fears aren't justified.
"I look at the fact that such a large number of leaders in this market have put up such consistent results for such a long period of time," says David Breiner, analyst with Volpe Brown Whelan. "Combined with other survey market data, that suggests the market's not saturated, that's there's lots of room for multiple players in the foreseeable future."
Even with the Windows NT business that Seagate will bring, Veritas won't be overlapping that much with Legato, Payne says. Veritas' strength still lies in storage for workgroups centered around high-end Unix servers. Legato focuses on distributed networks, which are spread out over many more units.
All told, less than one-third of Veritas' business overlaps with Legato, and where they do cross, Legato has thrice the business of Veritas, Payne says.
"This is not as mano-a-mano as people think," he says. "You have two companies, with very high growth rates, essentially dominating their field."
And with Legato adding the well-regarded technologies of FullTime and another acquisition, Intelliguard Software, the company can look for larger contracts with better margins. Adding to the optimism, Legato says the Fulltime and Intelliguard will add to earnings in the current quarter; investors had been worried that the deals wouldn't be accretive until the second half of the year.
Investors can get a firmer handle on Legato tomorrow, when the company reports first quarter earnings. Barring some kind of disappointment, Legato's earnings per share should jump more than 50 percent this year. It's the kind of growth most software companies can only fantasize about. |
