People were contemplating on the AOL board why New D had been falling recently. Here is my response to those questions:
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Why are people selling? Irrational fear. Review the story, and you will agree
that the selling is indeed irrational. My response is quite long, so you may want
to copy and paste it into an offline viewer:
After spending 1995 remodeling their North American sales/marketing structure,
the company staffed up the sales force in early 1996. It takes six months to a
year for new sales people to get comfortable in their markets. After quiet
increases in revenues and a return to profitability over the last two years, the
company popped with third quarter revenue and earnings jumps. The fourth
quarter was so far above anything ANYBODY must have expected, certainly far
above the expectations of anyone I know, that the stock finally broke up through
three year resistance at the mid-eight range. They have introduced a couple of
cutting edge products in their security administration product, Control-SA, and
the Monday (3/17) announced Year 2000 software, Control-I/2000. Both of
these product areas have huge potential given the massive amounts of data
being created in our data and Inter-/Intra-/Extranet crazed society, and the need
to protect the corporate computing environment is huge. And the forecasters are
dead-on when talking about the major problem waiting out there when we turn
the clock to the 21st century. I work for Federal government agency in
Washington, and we have a huge committee looking into the Year 2000 problem
(and, I hear, we are not going to get there in time!). If you think it is not serious,
think about all the loans and other financial instruments that will not be able to
construct amortization payment schedules. Or, computing that a receivable is
one hundred years past due, instead of only being 15 days old.
The Gartner Group, in a review last summer, rated New Dimension's "Future
Vision" the highest of any competitors (by a seemingly very wide margin),
including (but not limited to) CA, IBM, and Platinum. (In fact, they Gartner had
CA all the way at the other end of the spectrum!) These views by Gartner were
in reviews of two different areas in which New D has flagship products, their
Control-M and Control-O software. That is no small blessing. At present, I am
told that IBM is in final design and testing of a solution combining Tivoli and a
New D product to run on IBM mainframes. Since IBM owns Tivoli, and are
teaming with New D for a total solution, do you really think they will not be
pushing the total solution they are now constructing? Of course they will. Per
the current issue of "Smart Money Magazine", the mainframe market is still very
hot, and should continue to be so at least well into the future. Per "Smart
Money", IBM mainframe sales have risen at a 50% annual clip over the last
three years! And, Smart Money states that "...mainframe computers, a segment
that's still growing rapidly because they still do some of the biggest jobs better
than desktop networks."
Using the last year's earnings, they trade at a P/E of 21. If you annualize the
last two quarters, more reflective of the now ramped up operations, you have a
P/E of 13. If you toss out the tax benefits, dampen the earnings a little more,
and simply say "what if they earn 15 cents per quarter this year?", you still have
a P/E of less than 17, on a company that is experiencing growth well in excess
of this pace. Toss in some earnings for the full-blown rollout of the security
product, Control-SA, add in the revenues (and likely earnings additions) from the
EDS-Germany purchase, and assume that they will sell some of the Control-
I/2000 product (inconceiveable that this will not be a nice product for them), and
where must revenues and earnings go? They even stated they are going to
increase the sales force about 15%, and negotiate some more deals to have
their products sold through other channels (which they have already done with
the Control-I/2000 product, as announced Monday). Who ramps up a sales
force if they expect business to fall? Nobody, that is who.
So, its both the quick-buck artists that sold, and those with irrational fear. I
watched these same people sell it at 8. This company now kicks the #$%& out
of the company it was 3-4 years ago, yet trades at a 60% discount from early
1994. It has been my experience over time that most investors really do NOT
read the story, so they never get into the guts of a company like this. The current
price action is silly, and makes astonishingly little sense. I like things that seem
this far out of whack, because when the market finally wises up, and the market
participants lose the irrational fear that this thing will fall back to four again, it will
free the stock to move back to where it belongs, which is a price at least equal to
where it was four years ago...when it was trading at $25 per share as a mere
shell of the company it is today. |
