MANU was picked by Individual Investor as Stock of the Day:
Stock of the Day
Jul 02, 1999
Manugistics: Finally Turning Around
by Dave Sterman 7/2/99
Investing in turnarounds can be a dicey business.
You're taking a big chance, hoping that a number of things that have gone wrong will
soon go right. But investors are drawn to these stocks time and again in hopes of
tripling or quadrupling their investment.
But if you stick by two rules of thumb, you can help minimize the risk of further drops in the stock price while seeing the
turnaround come together at a fast clip.
The first rule of thumb is to find companies that still have strong name recognition and a blue chip customer list in a
fast-growing market. This way, even if current management is unsuccessful at turning the ship around, the company would
still likely fetch a reasonable price if it were acquired.
The second rule: Buy companies that have clearly articulated the steps necessary to rebuild the business. And if they are
already implementing those steps, the turn could come quickly.
By those measures, Manugistics (NASDAQ:MANU - news) has the makings of a snappy comeback.
Manugistics virtually pioneered the market for supply chain management software. When Individual Investor magazine
selected the company for inclusion in the Magic 25 portfolio in 1996, the company was on the cusp of a heady growth
spurt. In the subsequent fiscal year, sales rose 53%, before rising another 89% in fiscal 1998.
The company's shares soared to $63 by April 1998 as analysts rushed to conclude that the company could soon dominate
the multi-billion dollar market for supply chain software. At the time, virtually every major corporation scrambled to put
together a strategy to manage their whole logistical process, from vendor relations to inventory management.
If Manugistics had one Achilles Heel, it was a sub par sales force that was too small to capture all of the company's
revenue opportunities. That opened the door for key competitor I2 Technologies (NASDAQ:ITWO - news) . As
Manugistics struggled to put the right pieces in place, I2 took off. While sales at Manugistics fell 1% to $178 million in the
last Fiscal Year, I2 boosted sales 69% to $362 million.
What's worse, anemic sales growth, coupled with an ever-expanding operating structure caused Manugistics to lose
money for four straight quarters. The stock, as a result, sank as low as $5.25.
But in the company's most recent quarter, Manugistics finally returned to profitability, earning a penny a share.
And although the stock has recovered somewhat to $13.63, Wall Street is still not totally sold on the turnaround story.
One reason: The company was profitable in the quarter as a result of massive cost-cutting implemented by new CEO Greg
Owens. And analysts figure Owens still needs to reinvigorate the business and add meaningful growth to the top line. "The
wait-and-see attitude has more to do with whether they can really develop meaningful license revenue growth," says Legg
Mason's Chris Desautelle.
But Owens looks like the right man for the job, and he's laid out a convincing plan to restore the company's luster. Prior to
joining the company in late April, Owens was the head of Andersen Consulting's Global Supply Chain practice. Andersen
has been at the forefront in advising major corporations how to handle their supply chain strategies, with Owens leading
the way. Not only does he bring a Golden Rolodex to his new job, but he has a clear understanding of why Manugistics
slipped in the race against I2. "He's a very quality individual who really knows the space," says Desautelle.
But Wall Street is, if anything, myopic. Owens was at the helm for just one month when it concluded its most recent
quarter. Many were disappointed that the company didn't post stronger sales, since rumors circulated that the company
was in late-stage bidding on a number of contracts. Whether those contracts came through or not shouldn't be a litmus test
for Owens.
Owens' growth strategy entails stepping up efforts in the company's core strengths while expanding into new ones.
Manugistics has always had strong relationships with consumer goods makers such as Procter & Gamble (NYSE:PG -
news) . Owens also wants to garner more high-tech manufacturers, a space currently dominated by I2. An acquisition last
year of Promira Software should help Manugistics bring in new business from semiconductor companies.
Legg Mason's Desautelle also sees the possibility of lucrative contracts from major auto makers. "I2 has a pilot program
with Ford (NYSE:F - news) now, and GM (NYSE:GM - news) may eventually award a large contract for supply chain
management.
Owens also needs to have the right sales force in place. Last December, Manugistics promoted Jeff Holmes to head up
this effort. Holmes is generally held in high regard among analysts, and has worked to bring in some fresh blood. "But
getting good sales people is hard," says Desautelle, adding that "it takes six months for a salesman to really start to
produce." The takeaway message: Manugistics will likely report tepid results in the second fiscal quarter ended August.
But soon thereafter, things could start to heat up. "They're bidding on a lot of high profile contracts," says Desautelle.
Even if Owens is unable to bring Manugistics back from the abyss, the shares are undervalued on a buyout basis. As
IIOnline Editor Steve Taub noted , Manugistics could fetch a premium in a buyout.
But don't look for a deal any time soon. Owens is certainly going to be given several quarters to work the sales force into
fighting shape.
In the mean time, the shares offer compelling value. Manugistics' price/sales ratio is just 1.5, while I2 sells for 6.4 times
sales.
Bottom Line:
As Manugistics builds operating momentum, the value gap is sure to close. As Legg Mason's Desautelle notes, "If you're a
long-term investor, it's a great stock to buy." |
