NEW YORK (Dow Jones)--James Moore of Deutsche Banc Alex. Brown became the
latest analyst to sound a cautious tone and lower his estimates for the
software sector.
In a research note Wednesday, Moore said the "fundamental outlook for
software companies has weakened considerably" in the wake of Oracle Corp.'s
(ORCL) preannouncement and mounting evidence of slower information technology
spending.
The analyst lowered his revenue and earnings estimates for the next two
fiscal years and reduced his growth targets on six software companies,
including Ariba Inc. (ARBA) and i2 Technologies Inc. (ITWO). He didn't change
his investment ratings.
Several investment banks, including Goldman Sachs & Co., Morgan Stanley Dean
Witter, Credit Suisse First Boston Corp. and Thomas Weisel Partners, have
similarly made sweeping estimate cuts for software companies in the wake of
Oracle's warnings. Some brokerages also downgraded numerous ratings.
Moore also outlined for investors three possible scenarios for software
stocks this year. In the most optimistic case, IT spending will snap back
shortly and software stocks return to their traditionally high valuations. The
stocks then would soar on average more than 85%, Moore calculates.
In the bearish case, continued weak IT spending prompts analysts to reduce
estimates by 15% to 30% and stock multiples continue to compress. Battered
software stocks would then drop by an additional 36% on average, Moore
estimates.
However, the most likely scenario, Moore said, would be a modest pickup in IT
spending from February's levels with analysts' estimates being slightly
reduced. This would allow software stocks to rally an average of 35%, he said.
Moore's top pick in the group remains Mercury Interactive Corp. (MERQ). It
has low-priced products that can be quickly set up, so it might be spared the
budget cutter's axe. However, Moore noted that Mercury's valuation and market
risks still pose "significant downside potential over the medium term."
As for Oracle, Moore warns that "in a prolonged economic downturn, downside
risk in Oracle shares could be up to 40%."
Moore set a 12-month price target of $20 for the database giant, only
slightly above Tuesday's $17.63 close, but said the shares could trade much
higher if the economy and stock market recover quickly.
The six companies whose estimates Moore cut Wednesday were Ariba, i2,
Commerce One Inc. (CMRC), BEA Systems Inc. (BEAS), Business Objects SA (BOBJ)
and Tibco Software Inc. (TIBX). Moore still awards these stocks buy
recommendations.
-By Marcelo Prince, Dow Jones Newswires; 201-938-5244; |
