Maybe there's an answer here:
SMARTMONEY DAILY SCREEN: The
Fixers
By Tiernan Ray
SmartMoney Interactive
NEW YORK (Dow Jones)--No one wants to be left holding the bag when
technology issues slide. Tuesday's analysis of the semiconductor equipment
market by Merrill Lynch analyst Tom Kurlak provides ample evidence that,
in a market preoccupied with Asia and the fate of the PC market at home,
being "close to the metal," as they say in the computer business, can be
deadly.
As Kurlak stated in his report, the chip business is headed for "collapse"
going into the latter part of the year. But what's new in this cyclical
downturn, apparently, is the slowdown in computer buying in the U.S., not
the collapse of Japan's economy. The latest figures from market research
firm Dataquest put the number of PCs sold in the U.S. in the first quarter of
this year at 8 million units. That's 19% growth for the quarter over the same
quarter a year ago, but it doesn't please Kurlak and it's probably less than
most PC vendors and PC resellers would like to see. And with the
increasing popularity of sub-$1,000 PCs, there's less money than ever to
be made on those shipments.
Bad time to be selling hardware, in other words. So where do you look for
growth and value? One answer: companies specializing in computer
services, the subject of this screen. The best of these companies boast high
margins and surging demand for their services from an ever-expanding base
of corporate customers. Some of them promise solutions to the infamous
Year 2000 problem. But others go beyond that niche to offer a full range of
se rvices.
You probably haven't heard about many of the companies on today's
screen. But some of these relatively obscure firms have some big-name
clients. For example, International Network Services (INSS), a Sunnyvale,
Calif., concern, is a great way to increase your investment in Cisco Systems
(CSCO) if you already like the leading networking vendor.
INSS provides consulting to help information technology shops set up
wide-area networking, and it has an equity investment from Cisco. Analysts
estimate that the company's $1.3 billion market cap includes about $300
million in value alone for its software, which includes technology for
managing networks. And the cost of goods for its consulting services leaves
about 50% profit before operating expenses.
All in all, then, if you can find a good services outfit, you may be able to get
in on a business with margins closer to that of a software company, rather
than a hardware business or equipment reseller. Unfortunately, many of the
'pure plays' i n computer services are quite expensive, having seen their
stocks rise in the past six months, thanks to popular fascination with Y2K
stocks generally.
At a recent price of 41, INSS is trading at roughly 172 times trailing
earnings and 89 times the 46 cents per share analysts are expecting this
year. Its stock has risen by about 156% since the end of last year, so you
may have missed the best run on this company. But with earnings
projections of 67 cents per share next year and $1 in 2000, INSS has one
of the higher growth rates in our screen - 46% in the next three to five
years.
Likewise, Network Solutions (NSOL) of Herndon, Va., has the highest
projected growth rate of our group - 52% for the next three to five years.
The company has what may be a license to print money in the Internet
economy: Its job is to register the domain name sites that make up the Web
addresses you enter into your browser to find a site.
Based on projected earnings of about 57 cents this fiscal year, Network
Solutions' price today, of about 46 cents, gives it a forward P/E of 81.
Given next year's consensus estimate of 92 cents, the company's still
trading at 50 times projected earnings. Problem is, NSOL is projected to
have competition in domain name registration. If you missed the company's
IPO last September of $18 per share, you also missed the runup to a high
of $55 on May 1. But if you've already bet on Amazon.com (AMZN) and
Yahoo! (YHOO), maybe you'd like to add this Internet stock to your
basket.
At 28, Systems and Computer Technology (SCTC), which sets up
computer systems for government and academia, trades at 42 times last
year's earnings of 66 cents, and 31 times projected earnings next year of
90 cents. Even tiny Computer Outsourcing Services (COSI), which just
made its first $1 million in profit in the six months ended April 30, 1998, is
trading at about 55 times last year's estimated earnings of 18 cents.
Coverage has ceased on this stock, so it's tough to say whether the 68%
jump in net income for 1997 over that for 1996 will continue in fiscal 1998.
The cheapest of the bunch turns out to be Computer Horizons (CHRZ),
which is intriguing because the company is typically considered one of the
pure plays in solving the Year 2000 problem. The Mountain Lakes, N.J.,
firm, which has been a favorite of, among others, Bear Stearns' Liz
Mackay, brought in $335 million in sales last year, vs. $233 million in
1996.
Will the frenzy for Y2K services continue? CHRZ's executives seem to
think so: The company has snapped up talent in the area, including the
acquisition of British firm Spargo, announced in May, for $67 million. With
a market cap of $1 billion and $78 million in cash on the books as of May,
and long-term debt of only about $1 million, the company has room to
make some more acquisitions, though not a lot.
The company's growth has slowed, though, with revenue in the March
quarter just barely beating the preceding quarter by roughly $100,000. Still,
the company's projected EPS g rowth rate is 90% for the next two years,
35% for the next three to five years. Analysts are looking for $1.32 per
share in earnings this year, and $1.70 after that, or increases of 57%
percent and 28% respectively.
But Computer Horizons has consulting talent that can do more than simply
fix the Y2K problem. Its staff is skilled in general problems of setting up
computer networks and putting together the right hardware and software
systems. That's important, because software-only companies that have
focused exclusively on Y2K have not faired nearly as well in the market.
Viasoft (VIAS), a Y2K software concern, has fallen from a high of 65 last
fall to close at 15 7/8 Wednesday.
In a marketplace with near-full employment and a general shortage of
talented computer programmers, having skilled labor may be CHRZ's
greatest asset going forward. At a price of 36 7/8, the company is well off
its high of 53 1/2 and represents a multiple of only 27 for this year's
projected earnings. That suggests CHRZ is cheap relative to its peers and
perhaps worth a second look.
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