Clip from interview in Barron's. Q/A with Charles "Chip" Morris, head of the T. Rowe Price Science & Technology fund on Y2K problem:
Q: Chip, are you finding opportunities here?
Morris: Yes, although the valuations are a little aggressive. We own companies like Gartner Group, which scares the heck out of everyone, by telling them how much they need to invest in the problem. We own a little bit of EMC, some information technology-strategy companies, and Platinum Technology, which offers some Y2K software. And we think companies selling mainframe-based software are probably going to benefit as people have to run parallel implementations of the software for testing purposes. As we get closer and closer to December 1999, it will be less an issue of money and more an issue of internal information-technology resources at large companies. So you might have a situation where there is plenty of money in the budget to put in software from SAP or Peoplesoft or Baan, but not enough people to do it and still take care of the Year 2000 problem. I can almost see in a year's time how those software companies will slow down.
Q: Well, anyway, Chip, here's your chance to be a hero. What would you avoid?
Morris: This always gets me in trouble.
Q: Be brave.
Morris: I think the ERP vendors could be headed for trouble.
Q: What's an ERP?
Morris: It's short for enterprise resource planning. Companies like SAP, Baan and Peoplesoft, which sell large software programs that play an integral role in helping companies run their businesses. These companies have benefited from the Year 2000 problem -- and from poor accounting rules. If you fix an existing system, that counts as a current expense. Which is bad. If you buy a new system, that's a capital-budget item, and you get to amortize it over time. So you have the choice of fixing something for $10 million and expensing it, or buying something for $10 million, and writing off $1 million a year over 10 years.
Q: Some choice.
Morris: If you're the chief investment officer, would you rather go to the CFO and say you need $10 million right now, or would you rather tell him you need a small bump in the budget for some years to come because you have to fix the Y2K problem? That issue has been helping the ERP companies. But as John pointed out, no one should be surprised if a year from now, we hear companies warning about near-term earnings shortfalls as companies stop trying to implement new systems, and focus on the short-term consequences of the year 2000 problem.
Q: So would you dump them now?
Morris: Well, these stocks can be viable at 30-35 times earnings. But most of them are selling at 50-60 times earnings, which is a whole different story. There will be plenty of growth for these companies beyond the year 2000. They've had plenty of business lately, which should continue through mid-1998. But then it's going to start to reverse. If you want to focus on a single company, look at SAP, whose software takes the longest to implement. They'd see the slowdown first. Peoplesoft would probably see it last. In short, while we like these companies for the long haul, the high valuations make the Year 2000-related slowdown a real issue. |
