From Briefing.com: 4:37PM Advanced Micro confirms Dell decision to offer customers a choice (AMD) 31.35 +0.58 : Co releases statement today regarding the announcement Dell (DELL) made in its quarterly earnings statement that it intends to offer AMD Opteron Dual Core processor-based servers.
4:20 pm : What was shaping up to be a respectable bounce in the aftermath of yesterday's broad-based drubbing lost steam going into the close, as many of the market leaders behind this year's early stock rally succumbed to even more aggressive profit-taking.
Before the bell, a sense that Wednesday's CPI-induced sell-off was overdone renewed some enthusiasm for stocks and even helped bonds regain some noticeable upside momentum. To wit, the yield on the 10-yr note fell 8 basis points to 5.06% after Richmond Fed President Jeffrey Lacker told reporters that, "containing inflation has to be the [Fed's] primary focus." Nevertheless, the rate-sensitive Financial sector's failure to take advantage of a welcomed decline in borrowing costs merely exacerbated lingering concerns about building inflationary pressures slowing economic expansion and potentially ending 11 straight quarters of double-digit profit growth. Energy's inability to take advantage of a 1.1% rebound in the price of crude also added to the market's apprehension and growing realization that Energy sector profits are unlikely to increase at the same pace as over the past year. Adding to today's struggles to keep sellers on the sidelines for the first time in several sessions was the inability by the Dow, S&P and Nasdaq to find support above key technical levels of 11174, 1267 and 2189, respectively.
The Dow initially found some modest support from Home Depot (HD 38.41 +0.40), which expanded its stock buyback program by $2.0 bln, and Hewlett-Packard (HPQ 32.48 +0.32), which was upgraded by Morgan Stanley. However, the temptation to lock in more gains, especially from three of the biggest reasons the Dow flirted with all-time highs last week -- Boeing (BA 82.73 -1.04), Caterpillar (CAT 74.62 -1.29) and United Technologies (UTX 62.66 -1.09) -- weighed heavily on the price-weighted index.
The Nasdaq got an early boost from Dell (DELL 23.95 +0.32), ahead of its Q1 report after the bell, Sears Holdings (SHLD 155.85 +17.89), which handily topped analysts' forecasts, and the chance that an unwinding of the excess optimism that had pushed the tech-heavy index into negative territory a day earlier might be over. In the end, though, bargain hunters were outnumbered as the Composite extended its losing streak to 8 straight days. BTK -2.1% DJ30 -77.32 DJTA -0.9% DJUA +0.2% DOT -0.6% NASDAQ -15.48 NQ100 -0.7% R2K -1.0% SOX -0.9% SP400 -0.9% SP500 -8.51 XOI -1.0% NASDAQ Dec/Adv/Vol 1895/1147/2.07 bln NYSE Dec/Adv/Vol 2014/1219/1.83 bln
4:15PM Brooks Automation announces election of Joseph Martin as Chairman of the Board (BRKS) 12.30 -0.42 :
4:10PM Marvell beats by $0.02, beats on revs (MRVL) 49.71 -0.65 : Reports Q1 (Apr) earnings of $0.44 per share, excluding non-recurring items, $0.02 better than the Reuters Estimates consensus of $0.42; revenues rose 42.9% year/year to $521.2 mln vs the $516.7 mln consensus. "Q1 was another very strong quarter for Marvell... We are having strong success in driving the adoption of our advanced technologies into a number of exciting high volume Consumer and Enterprise markets. With this success, we are continuing to diversify our revenues which we expect will provide us with new high volume market opportunities and enable us to build upon our strong track record of solid revenue growth."
4:06PM UTStarcom receives NASDAQ notification related to late filing of its form 10-Q for the first quarter of 2006 (UTSI) 6.25 -0.04 : Co announces that, as expected, the co has received an additional Nasdaq Staff Determination Notice stating that the co has failed to file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and, therefore, is not in compliance with Marketplace Rule 4310(c) (14)... On May 10, 2006, the Listing Panel granted a conditional extension to the co's request for continued listing on the Nasdaq National Market until June 15, 2006 for the co to make its requisite filings. This extension granted by the Listing Panel expressly contemplated the delayed filing of the Q1 2006 Form 10-Q.
09:42 am Copa Holdings: Calyon Securities upgrades Add to Buy. Target $26 to $27. Firm ups rating and price target saying the co is getting stronger with compelling valuation. Firm states co's capacity increased by 58.6% with 20% organic growth at Copa Airlines and the rest coming from the AeroRepublica acquisition. In firms opinion, AeroRepublica presents the biggest challenge as well as the greatest potential reward and upside. CPA's goal is to strengthen its profitability by improving the carrier's operational and financial performance. The co appears to have hit its stride about 12 months earlier than firm was expecting and is in a position for strong additional growth. Firm believes continued growth will come from economic growth in the Central and South American region, demand stimulation by increased frequencies and destinations, and more tourism to the region. Firm thinks CPA has a solid business model to take advantage of these developments with its dominance in the Panama City hub. Another advantage for CPA is its code-share agreement with GOL, which enables the carrier to blanket South America and tie itself to another powerful high growth airline in the region.
09:30 am Prudential: Banc of America Sec reiterates Buy. Target $83 to $85. Firm raises price target after hosting meetings with mgt, while also pointing out that sales comparisons in Japan (35% of co earnings) could be negative again in the 2Q given that the co is lapping very difficult comparisons against new product introductions. The firm views this as a near-term challenge only, because longer-term Prudential's business in Japan is strong as it continues to penetrate third party distribution channels. Upon stock weakness, the firm would look to accumulate.
09:29 am Shanda Interactive: Brean Murray reiterates Sell . Target $10 to $8. Firm cuts target saying they are encouraged by a bottoming of game revenue, Shanda missed their 1Q06 EPS estimate by seven cents due to weak margins. The firm says monetization of the EZ strategy continues to be challenging, and no major new game will commercialize until late 2H06.
09:27 am Transocean: Credit Suisse reiterates Outperform. Target $102 to $106. Firm raises price target saying they continue to believe that Transocean's market leading position in the deepwater and mid-water depth floater markets will drive above average earnings growth and outperformance from here. In addition, the firm says the co has more limited exposure to the North American natural gas market, and they believe the stock would be defensive if U.S. gas prices fall further.
09:23 am Health Grades: Miller Johnson initiates Outperform. Target $8. Firm initiates coverage saying high rates of growth should continue for the foreseeable future. Firm says the co's 2006 rev growth rate guidance of 40% is primarily internally generated, and should continue in the future due to increasing demand and awareness.: Firm initiates coverage saying high rates of growth should continue for the foreseeable future. Firm says the co's 2006 rev growth rate guidance of 40% is primarily internally generated, and should continue in the future due to increasing demand and awareness.
09:21 am Liberty Media Hldg: Credit Suisse initiates Outperform. Target $23.2. Firm initiates coverage saying they believe the current discount is overstating the risks associated with the co, and that share price performance has been negatively affected by the poor performance of its listed interactive assets. The firm says while the achievement of operational growth is becoming more challenging, particularly in the domestic market, they believe management expertise is evident when comparing the strong sales and margin performance the business is achieving versus its competitors.
09:18 am China Grentech: WR Hambrecht initiates Buy. Target $18. Firm initiates co saying they recommend the stock to investors for the following reasons: (1) the co competes in the Chinese wireless market which is expected to grow more than 30% in the next couple of years; (2) they believe the co is well positioned with the two top wireless providers in China - China Mobile and China Unicom; (3) compelling RF product portfolio in the wireless coverage area that positions it as the #2 supplier in China; (4) potential upside to 2006 and 2007 estimates as 3G begins to roll out in China; (5) better GM of 49% than its major Chinese competitor of Comba and US competitors Andrew and Powerwave; (6) significant potential earnings and rev leverage in 2007 of 16% and 28%, respectively; and (7) attractive valuation.
4:09 pm Merck & Co. Inc. (MRK)
35.05 +0.71: Merck & Co. Inc. got a potentially significant response from a Food and Drug Administration advisory committee Thursday afternoon when U.S. advisors unanimously said a vaccine to prevent cervical cancer that is produced by the company is safe for females as young as nine.
The FDA will make its final decision regarding the vaccine - Gardasil - by June 8. The FDA tends to follow the lead of its advisory panels.
The vaccine was created to prevent human papillomavirus, a sexually-transmitted virus that causes most cases of cervical cancer. A Merck official said during a CNBC interview that the company is also testing the vaccine for efficacy in boys, as men can transmit the virus. Because of its potentially huge user base, some analysts are predicting that in four years the drug could be a $3 billion a year product.
--Christine Marie Nielsen, Briefing.com
12:50 pm Foot Locker (FL)
22.00 -0.30: Foot Locker said Wednesday its profits rose modestly in the fiscal first quarter, as strong business in North America was offset by weak business in Europe. Specifically, the athletic footwear retailer reported net income of $59 million, or $0.38 per share, excluding stock option expenses, compared with $58 million, or $0.37 per share in the year ago period. That fell in line with analysts' expectations, according to Reuters Estimates.
Sales in the quarter slipped to $1.37 billion from $1.38 billion last year. Excluding the impact of foreign currency fluctuations, total sales increased 0.2%. Same store sales, meanwhile, edged up 0.5%. The company said the results reflected a strong performance in each of its North American businesses, offset by sales and profit declines in its European operations. Despite the lower sales, however, quarterly earnings were boosted by lower than expected markdowns that benefited gross margin.
Foot Locker projected earnings between $0.27 and $0.30 per share for the second quarter, and from $1.75 to $1.85 per share for the full year, excluding stock option expense. Analysts, meanwhile, are forecasting $0.30 per share for the current quarter, and $1.77 for the fiscal year.
Based on the latest results, shares of Foot Locker have trended slightly lower, falling approximately 3% during the regular trading session. At the current price level, the stock is valued at a seemingly cheap 12.4x forward earnings versus its historical average of 16x earnings. The stock also sports an appealing P/E-to-growth ratio of 0.88. While Europe continues to be a drag on operations, our long term investment thesis remains intact given the current attractive valuation level, as well as the company's healthy domestic business, solid balance sheet, and free cash flow.
--Richard Jahnke, Briefing.com
12:18 pm PetSmart (PETM)
27.23 -0.15: Retailer PetSmart's first quarter net income slipped to $41.8 million, or $0.30 per share, from $44.7 million, or $0.30 per share, in the year-ago period. The latter was boosted by a pre-tax gain of $8.5 million, or $0.035 per share after tax, related to a legal settlement. PetSmart's bottom-line result was in line with the Reuters Estimates consensus estimate, and when the gain from the prior year is excluded, it translated to an approximately 15% increase in EPS.
Net sales were up 12% to $1.01 billion, but its cost of sales as a percentage of sales increased 28 basis points from the prior year and led to a compression in its gross margin rate to 30.65% from 30.93%. The pet retailer achieved a 3.7% increase in comparable store sales on top of a 5.7% increase last year. Despite the drop in gross margins, shares of PETM are holding their own in the wake of the report based on two important factors.
The first factor is that PetSmart provided guidance for the second quarter and full-year that was in line with the market's current expectations. Specifically, the company said it estimates earnings of $0.27-0.28 per share for the second quarter (consensus $0.28) and added that it continues to project earnings of $1.37-1.39 per share (consensus $1.39) for the year. The second factor includes the recognition that the company's services business continues to show good growth, with sales up 26.8% in the first quarter to $90.3 million. That is still a small portion of overall sales, but it's an important trend because the pet services business carries higher profit margins and and is a focus in the company's long-term growth plan.
The market's enthusiasm for PetSmart's stock isn't as great as it once was, though, given that retailing behemoths like Wal-Mart (WMT) and Target (TGT) are encroaching on the pet care category. Their presence has provoked concerns that PetSmart's profit margins will be pressured as it competes more aggressively to capture, and to retain, its customers. One can understand, then, why PetSmart is focused on expanding the pet services business since that provides it with a competitive advantage.
At its current level, PETM trades at 22.7x trailing twelve month earnings. That is roughly a 40% discount to its 5-year historical average. It is our view that PETM provides some good value at this level given its industry-leading status and the growing popularity of pets in American households. However, one is not likely to see material multiple expansion over the near-term given the market's underlying concerns about discretionary spending, and the emerging competition from the aforementioned retailers, as well as the continued competition from longtime rival Petco Animal Supplies (PETC).
--Patrick J. O'Hare, Briefing.com
11:41 am Salesforce.com (CRM)
30.04 -0.13: Shares in the on-demand business services company Salesforce.com are near unchanged this morning as investors mull over a lack of upside in the company's earnings per share for the latest period and a slightly disappointing new subscriber count.
The company, which has market cap of about $3.35 billion, said late Wednesday that it saw earnings of $0.04 per share, excluding non-recurring items. That was in line with Reuters Estimates consensus. Revenues rose 63.1% year over year to $104.7 million versus $101.7 million consensus.
The company, which provides customer relationship management and business application services that enable customers to record, store, and act upon business data, said the number of its paying subscribers rose by 45,000 for a total of 444,000, up 66% year over year. That compared to Street expectations for a gain of 46,000 to 47,000.
Salesforce.com also issued downside guidance for the second quarter, anticipating earnings per share of $0.03 to 0.04 versus consensus of $0.05. The company said it sees second-quarter revenue of $112 million to $114 million versus $112.95 million consensus. It also issued mixed guidance for 2007, seeing earnings per share of $0.17 to $0.19 versus consensus of $0.22. The company sees 2007 revenue of $478 to $483 million versus $476.45 million consensus.
Salesforce.com will hold an invitation-only lunch in New York at noon local time. A webcast will be available on the company's investor relations website.
--Christine Marie Nielsen, Briefing.com
11:17 am GameStop (GME)
46.03 +1.43: Shares of GameStop traded higher on Thursday, gaining nearly 7%, after the video game retailer reported record sales and earnings for its fiscal first quarter, driven by stronger sales of Xbox 360 hardware and software and the addition of Electronics Boutique. Shares of the company remain well positioned for the long-term as the industry moves through the transition to new hardware platforms and key integration efforts with Electronics Boutique continue to unfold.
For the first quarter, GameStop said net income increased to $11.7 million, or $0.15 per share, from $10.3 million, or $0.19 per share, a year ago. Revenue, meanwhile, more than doubled to $1.04 billion, buoyed by the recent acquisition of former rival Electronics Boutique. According to Reuters Estimates, analysts on average were expecting the company to post earnings of $0.05 per share on revenue of $1.03 billion.
Same store sales fell 3.3% during the quarter, beating the company's previously announced guidance of -7.0% to -9.0%. The jump was a result of stronger sales of Microsoft Xbox titles such as Elder Scrolls IV: Oblivion and Ghost Recon: Advanced War Fighter, the company said.
Looking to the second quarter, GameStop projected earnings in the range of $0.04 and $0.05 per share, versus the consensus estimate of $0.08 per share. Given the strong first quarter results, it also raised its earnings outlook for the full year to $1.93 to $2.03 per share, including acquisition costs, up from its previous guidance of $1.83 to 41.93 per share. Analysts are forecasting earnings of $1.91 per share, according to Reuters Estimates.
--Richard Jahnke, Briefing.com
10:28 am Advance Auto Parts (AAP)
37.20 -1.00: Advance Auto Parts, a leading retailer of automotive aftermarket parts and accessories, said Thursday its net income for the first quarter rose 8%, but fell short of Wall Street's expectations, as higher energy prices and higher interest rates continued to weigh on consumer discretionary spending - a trend that underpins our Underweight rating on the Consumer Discretionary sector. Based on the latest results, and an in-line forecast for the fiscal year, shares of the company traded slightly lower in early market action.
In the latest quarter, the Roanoke, Virginia-based company earned $74.1 million, or $0.68 per share, up from $68.6 million, or $0.63 per share, in the same period last year. However, the result, which included a three-cents per share stock option expense, was a penny shy of analysts' expectations, according to Reuters Estimates.
Revenue at Advance Auto Parts rose 10.7% year/year to $1.39 billion, in line with the consensus estimate. Same store sales, or sales at stores open at least one year, increased 3.9%, with 0.5% growth from do-it-yourself sales and 16.3% from do-it-for-me sales. The 3.9% increase compares to a 9.2% increase in the year ago period, the company said.
"Higher energy prices and higher interest rates are reducing consumers' discretionary income," said chief executive Mike Coppola in a statement. "In addition, very mild winter weather unfavorably impacted first quarter sales." However, he noted that the company is working on initiatives to enhance sales and reduce expenses in non-sales related areas.
Given the current macro environment that is impacting its customers, Advance Auto Parts kept its full year outlook intact. Specifically, the company expects earnings in the range of $2.37 to $2.47 per share, including a stock option expense of $0.12 per share. It also anticipates same store sales between 3% and 5% for the year. According to Reuters Estimates, analysts are looking for earnings of $2.43 per share. For the fiscal second quarter, the company predicted earnings of $0.65 to $0.68 per share, compared with the consensus estimate of $0.68 per share.
--Richard Jahnke, Briefing.com
10:04 am Barnes & Noble Inc. (BKS)
43.49: Barnes & Noble Inc. said it saw first-quarter earnings of $0.14 per share, better than the Reuters Estimates consensus estimate of $0.13 thanks to the popularity of bestsellers such as Stephen King's "Cell" and John Grogan's "Marley & Me." Revenues rose 1.6% year over year to $1.11 billion versus consensus of $1.14 billion.
Barnes & Noble, the world's largest bookseller, said total sales for the first quarter increased 2% to $1.1 billion. Barnes & Noble store sales increased 2% to $980.5 million, with comparable store sales decreasing 0.3% for the quarter. B. Dalton sales were $23.3 million for the quarter, a 26% decrease due to store closings and a 1.8% comparable store sales decline. Sales at Barnes & Noble.com of $91.1 million were flat compared to the prior-year period.
Looking ahead, the company, which has a market cap of about $2.88 billion, said it anticipates second-quarter earnings per share of $0.22 to $0.26. That compares to Reuters Estimates consensus of $0.25. Barnes & Noble reaffirmed expectations for earnings per share of $2.20 to $2.30 for 2007, versus Reuters consensus of $2.29. All consensus earnings-per-share estimates, actuals and guidance include a stock-based comp expense.
Barnes & Noble also announced that its board of directors declared a quarterly cash dividend of $0.15 per share for stockholders of record at the close of business on June 9, payable on June 30.
--Christine Marie Nielsen, Briefing.com
09:20 am Intuit Inc. (INTU)
51.27: Intuit on Wednesday said its third quarter earnings fell less than 1% from the year ago period due to stock option expenses and a higher tax rate, while a strong consumer tax season and continued strong performance in QuickBooks boosted revenue by 14%. The Mountain View, California-based maker of personal finance software also raised its outlook for the fiscal year, and announced a two-for-one stock split and a new share repurchase program. This move reaffirms our positive view on the stock.
For the most recent quarter, Intuit reported net income of $298.6 million, or $1.68 per share, compared with $300.5 million, or $1.61 per share, a year earlier. Excluding one-time items, the company's profit was $318.3 million, or $1.79 per share. On that basis, analysts were expecting the company to earn $1.76 per share, according to Thomson First Call.
Revenue for the period increased to $952.6 million from $834.9 million last year, the company said, helped by a strong consumer tax season. Indeed, third quarter consumer tax revenue of $499 million was up 19% over the year ago period, while Federal units, excluding Free File, were up 20% year/year, driven by strong growth on the Web. Additionally, sales of Intuit's QuickBooks products continued to perform well, generating sales of $212 million, an 8% increase from last year.
Based on its strong third quarter performance, Intuit raised its outlook for 2006. The company forecasted earnings between $2.40 and $2.42 per share, excluding items, and revenue in the range of $2.31 to $2.33 billion. Its previous guidance called for full year earnings of $2.37 to $2.40 per share. Currently, analysts on average are looking for a profit of $2.13 per share on revenue of $2.31 billion.
Intuit also announced a two-for-one stock split planned for July 6, 2006 and a new stock repurchase program for up to $500 million over the next three years.
--Richard Jahnke, Briefing.com
09:07 am Gymboree (GYMB)
32.95: Specialty retailer Gymboree (GYMB), which is a suggested holding in our Active Portfolio, delivered yet another impressive earnings report. For the first quarter ended April 29, the company reported net earnings of $17.9 million, or $0.53 per diluted share. The latter was seven cents ahead of the Reuters Estimates consensus estimate. In the year-ago period, which included income from discontinued operations, net earnings were $5.52 million, or $0.18 per diluted share.
The strong bottom-line growth was facilitated by a 16% increase in net sales to $188.9 million and a 13% jump in comparable store sales. The success of its merchandising and inventory management initiatives was reflected in the strong improvement in its gross margin rate, which was 47.9% versus 39.7% last year. In turn, the expense leverage gained from the increase in sales showed in its operating margins, which spiked to 14.4% from 4.90%.
According to Thomson StreetEvents, the company said on its conference call that it isn't expecting the margin improvement in the second quarter to be as large as what was seen in the first quarter. In turn, it was noted that product cost savings won't be as significant in the latter half of the year as in the first half since it will be butting up against the anniversary date of product cost reduction initiatives. Nonetheless, Gymboree still offered encouraging bottom-line guidance.
For the second quarter, Gymboree expects to report a loss of $0.07-0.09 per share, including stock-based compensation expense of $0.04 per share, versus the consensus estimate which is now pegged at a loss of $0.10 per share. In the year-ago period, Gymboree recorded a loss of $0.12 per share. Comparable store sales are expected to be up in the mid to high single digits.
For the full-year, management anticipates the company earning $1.37-1.40, including stock-based compensation expense of $0.15 per share. The company provided the same guidance range on May 4, but at the time it was excluding stock-based compensation. Hence, its guidance is actually $0.15 above the prior guidance range. Reuters Estimates tells us, though, that the consensus EPS estimate of $1.39 already included stock-based compensation, so it can be said the latest guidance is basically in line with expectations.
At 23.7x estimated earnings, GYMB can't be deemed a cheap retail stock. Its premium valuation is warranted, however, given the clear signs of operating momentum that are reflected in the margin expansion and upward revisions to consensus EPS estimates. Comparisons will be getting more difficult, but with no discernible chink in its armor at this point, we are reiterating our support for Gymboree as a suggested holding in our Active Portfolio.
--Patrick J. O'Hare, Briefing.com
09:00 am Limited Brands (LTD)
25.30: Limited Brands Inc. has turned out some sexy numbers for the latest period. The company says healthy business in its segment which offers women's unmentionables boosted first-quarter net income to $99.4 million, or $0.25 per share, versus net income of $83.3 million, or $0.20 per share, in the year-ago quarter. That was a penny above Reuters Estimates consensus and $0.09 above the company's initial guidance.
The company, based in Columbus, Ohio, says it saw strong results in its Victoria's Secret division, with sales up by 10% in the latest period. Net sales for the company rose 5.2% to $2.1 billion, and same-store sales rose 5%. Revenues rose 5.2% year over year to $2.08 billion versus the $2.07 billion consensus.
Limited officials issued in-line to slightly better guidance for the company, which has a market cap of about $9.98 billion. They said they see second-quarter earnings per share of $0.22 to $0.24 versus $0.22 consensus. Second-quarter figures include a charge of $0.01 per share to account for stock-based employee compensation. The company sees guidance of $1.50 to $1.60 earnings per share for the full year of 2007, versus consensus of $1.51.
Limited also operates Bath & Body Works stores and an apparel segment, which includes Express and The Limited stores.
--Christine Marie Nielsen, Briefing.com
08:32 am Ahead of the Curve: Ent. App. SW Acq. Candidates HYSL BOBJ - Is Acquisition Premise Weakening?
[BRIEFING.COM] In the last month, our picks for acquisition candidates in the enterprise application software market have declined sharply. The picks were made in early 2005, on the premise that the enterprise application software market was entering a consolidation phase. Hyperion Solutions (HYSL) is now down 4% over the past 15 months and Business Objects (BOBJ) is up 17%, after having been up as much as 60% earlier. Has the acquisition premise fizzled?
The Search For Acquisition Targets
Before discussing whether our acquisition premise for HYSL and BOBJ is still valid, it is worth reviewing how the premise was developed.
In prior articles on this topic, we have summarized the approach for picking these stocks in the following way:
Last year, on January 10, 2005, we began a search for companies with strong presence and growth in the enterprise (large corporation) application software market. The objective was to find possible acquisition targets.
Our primary thesis was that the enterprise software market was maturing and that, over time, value would accrue to vendors of applications.
The irony of this fundamental shift is that the largest software vendors, Microsoft (MSFT) and Oracle (ORCL), had little real presence (at the time) at the enterprise application level. Oracle's reaction to this shift was to begin acquiring entrenched applications as quickly as possible, which lead to a dozen acquisitions in 2005, including two of the biggest companies, Siebel Systems (SEBL) and Peoplesoft (PSFT).
Oracle's approach made it clear that it was too late to try to gain presence at the enterprise application level by building new applications from scratch. Any large software company that wanted presence at the application level would have to do so by acquiring an existing company with an entrenched application.
Methodology For Picking Acquisition Targets
Also from prior articles, here is a summary of the methodology we used for picking these stocks.
As part of our approach in January, we first detailed the methodology that would be used and then applied it, in real-time, to select the possible targets.
The logic behind our methodology used to select possible acquisition targets was detailed in the first two columns in this series, published on January 10 and 11 of this year. (For more details on our methodology, please read both columns.)
A table listing the prior articles in this series, along with other articles related to the theme of consolidation of the enterprise software market, can be found at the bottom of this article. The title of each article is a link that will bring up the column in a separate browser window.
Our search for other acquisition targets produced three stock picks, Business Objects (BOBJ), Hyperion Solutions (HYSL), and Witness Systems (WITS). We abandoned the Witness Systems position at a slight gain in late October of 2005. Since then, both Business Objects and Hyperion Solutions have risen sharply.
The Stock Picks
The methodology listed above produced three stocks: Hyperion Solutions (HYSL), Business Objects (BOBJ), and Witness Systems (WITS).
For more details on why these stocks were picked, refer to the prior articles listed in the table below.
Note: the premise for Witness Systems was negated in October of 2005 and the position was closed at a slight gain. (+3.5%). This gain turned out to be greater than the market's gain for the entire year, but for an acquisition premise, we had hoped for a greater return.
Stock Performance Since Picked As Targets
The following table summarizes the performance of our two remaining acquisition stocks since the date of our first article listing them as possible targets.
Item HYSL BOBJ
Date of Pick 26-Jan-05 8-Feb-05
Stock Price, Date of Pick $31.16 * $26.35
Stock Price, May 16, 2006 $29.90 $30.78
Return, % -4.0% 16.8%
* Note: split-adjusted basis. HYSL split 3:2 on December 20, 2005.
Both stocks are now well-below their highs for the 15 month period we have held them.
Performance Since Inception
In the following charts, the start date is the date that we selected each stock as an acquisition target. As the chart shows, BOBJ is still above our initial selection point, but has given up a substantial amount of its earlier returns.
Hyperion Solutions also showed positive returns for most of the past 15 months, but has recently given up those gains.
BOBJ Performance Against Market And Other Software Stocks
The following chart compares the performance of BOBJ since our acquisition premise was opened against that of Microsoft, Oracle, and SAP over the same time period.
HYSL Performance Against Market And Other Software Stocks
The following chart compares the performance of HYSL since our acquisition premise was opened against that of Microsoft, Oracle, and SAP over the same time period.
Fundamentals Comparison
The business fundamentals performance of BOBJ and HYSL over the past few months is larger because of lower valuations on fundamentals.
Metric As of 3/31/05 As of 3/31/06
BOBJ TTM REV, $M $957.2 $1,106.7
BOBJ REV Growth Rate (TTM / PTM) 45.1% 15.6%
BOBJ TTM, EPS $0.65 $0.96
BOBJ EPS Growth Rate (TTM / PTM) 140.7% 47.3%
It is clear that Business Objects' rate of growth is slowing, but this is "normal" as a company gets larger.
Metric As of 3/31/05 As of 3/31/06
HYSL TTM REV, $M $690.0 $730.3
HYSL REV Growth Rate (TTM / PTM) 18.2% 5.8%
HYSL TTM, EPS $0.98 $1.06
HYSL EPS Growth Rate (TTM / PTM) 50.8% 8.2%
As with Business Objects, Hyperion's growth rates are also slowing.
Valuation Comparisons
The following table compares valuations for BOBJ against levels from a year ago. The ratios are based upon stock prices of 5/16/2006 and 5/16/2005. Projected EPS numbers for the 2005 period are the estimates that were in place one year ago, not the actual EPS since reported. (Source: Reuters)
Valuation Multiple As of 3/31/05 As of 3/31/06
BOBJ Trailing PS 2.5 2.6
BOBJ Trailing PE 40.6 32.2
BOBJ Project EPS (forward twelve months -GAAP) $0.91 $1.03
BOBJ Forward PE (GAAP) 29.0 29.9
Although the growth rates for BOBJ have slowed, the market is retaining high valuations for future earnings potential.
The following table shows the valuation shifts (using the same methodology as above) for HYSL over the past year.
Valuation Multiple As of 3/31/05 As of 3/31/06
HYSL Trailing PS 2.4 2.4
HYSL Trailing PE 28.0 28.2
HYSL Project EPS (forward twelve months -GAAP) $1.02 $1.03
HYSL Forward PE (GAAP) 26.9 29.0
As with BOBJ, the market has not drastically reduced valuation multiples on HYSL over the past year.
Maturing Enterprise Application Market
There is an overall concern among analysts that the enterprise application software market is now maturing.
The fundamentals support this idea, as the revenue and growth rates of nearly all of the major firms in the BI marketplace are slowing down.
However, the application space, and particularly the BI space, is still showing stronger growth than other areas of the software marketplace. In addition, margin expansion is still occurring (to some degree) in nearly every "pure" applications vendor.
There is a major difference between the maturing applications market and the already mature infrastructure software market (operating systems, databases, and integration tools), however.
The applications vendors have a much better chance of retaining pricing power than do vendors of infrastructure software. The strong stock performance of SAP over the past year is very strong evidence of this point.
If vendors of infrastructure software do not make the shift to selling applications within the next three years, they will face very strong sales resistance in the marketplace, which will erode their pricing power.
Oracle appears to understand this idea clearly. Microsoft appears to be missing it.
Microsoft's Entry
A further fear in the market that has driven valuations downward is that Microsoft's recent entry into the BI space represents a threat to existing players.
For many reasons, we think this fear is somewhat unfounded, as Microsoft's product runs only on Windows and seems primarily aimed at smaller businesses than those served by Business Objects and Hyperion Solutions. (See the Ahead of the Curve column of March 31, 2006 for more details.)
In fact, we still think that Microsoft's best strategic move would be to acquire SAP, not to develop their own applications from scratch. We admit there might be operational difficulties with this acquisition, but a strategy of developing new applications to compete against the existing applications seems worse.
Analysis Of Acquisition Premise
The acquisition premise was based on three key points:
The overall software market is maturing
Value will accrue to applications vendors and away from vendors of platform (operating systems) and tools (database and integration) vendors.
It is too late to develop new applications; a player without presence must acquire another vendor to obtain significant presence
For the most part, all of these elements are still true.
The only new element in the past year is that the enterprise application market is now showing signs of maturity as well.
A mature market is not the ideal market for introducing new products. Without a "killer" competitive advantage, of a disruptive nature, it makes it very hard for a new product to show explosive growth.
We tend to think it is probably "too late" for Oracle's new BI product (acquired with the Siebel acquisition) and almost certainly too late for Microsoft's product to be a significant factor.
The existing Business Intelligence "pure players" are therefore likely to be the eventual dominant vendors in the BI space. This largely means Cognos, Hyperion Solutions, and Business Objects.
Conclusions
The slowdown in the enterprise application market seen by both Hyperion Solutions and Business Objects has resulted in both of their stocks declining sharply in the past three months.
Ironically, this strengthens the acquisition premise upon which our original selection of HYSL and BOBJ were made. We therefore think that investors should continue to hold their existing positions. New positions in both companies can also be made at current levels using the same acquisition premise we formulated over a year ago.
Note: In accordance with Briefing.com's Trading Policy, the author has a personal position in both Hyperion Solutions and Business Objects.
--Robert V. Green, Briefing.com
biz.yahoo.com |
