lebo, Merrill sees solid tech service sector
Outsourcing, Net business to fuel double-digit growth
By Brenon Daly, CBS MarketWatch
Last Update: 4:15 PM ET Jul 8, 1999Software Report
SAN FRANCISCO (CBS.MW) -- The quarter-of-a-trillion-dollar market for computer services will grow at a double-digit rate for the coming years, Merrill Lynch said Thursday.
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"All roads lead through computer services," Merrill analyst Steve McClellan said on a conference call. Computer services -- an umbrella term used to cover the business of e-commerce, systems integration, outsourcing and Web consulting, among other areas -- is expected to generate sales of $318 billion by 2002.
McClellan said shares of service providers make solid investments now because the companies typically have recurring revenue, with long-term, stable contracts. The larger companies are increasing earnings 13 to 15 percent, with smaller companies boosting earnings 30 to 50 percent.
Outsourcing boom
Among the drivers for this growth: Companies are "swamped" with hardware and software that they need to bring together, even though there's a shortage of in-house information technology workers.
That's leading a lot of companies to look at outsourcing to get their computers and networks into line. McClellan projected outsourcing contracts will hit $60 billion this year, up from $15 billion last year.
IBM, for instance, has made hay with its services division. Big Blue (IBM: news, msgs) inked a 15-year, $1.2 billion e-commerce deal with French retailer Galeries Lafayette on Thursday -- the largest outsourcing contract ever signed in France.
Shares of IBM added 1 3/16 to 134 -- a new high. The record stock price comes on the back of solid growth of its services and software business; hardware sales during its most-recent fiscal year actually declined, although sales have picked back up recently.
Plenty of highs
Electronic Data Systems (EDS: news, msgs) shares also rallied, hitting a two-and-a-half year high. The stock gained 2 11/16 to 59 11/16, aided by an appearance on Salomon Smith Barney's list of standout stocks for the next year.
Another big name in the sector, Computer Sciences Corp. (CSC: news, msgs), shed 1/4 to 70 1/16 but is still just 5 points below a 52-week high. That's one of McClellan's top picks in the sector.
Other McClellan picks: telecom billing provider Convergys Corp. (CVG: news, msgs), computerized reservation company Galileo International (GLC: news, msgs) and DST Systems (DST: news, msgs), which provides products and services for the financial industry. All of those stocks are within a hair of highs for the year.
Despite the strong stock prices -- which can be used a powerful currency in any takeovers -- McClellan said he doesn't expect a flurry of buyouts. "I think there will be less formal (pairings) than mergers and acquisitions. I look for more marketing agreements, joint ventures and so forth," he said.
The larger companies would have a tough sell to their shareholders if they make acquisitions that dilute earnings.
Further, a takeover could spoil the work environment at a smaller company if it becomes part of a jumbo corporation, and that could drive away employees. |
