Stock of the Day
fnews.yahoo.com
Jan 26, 1999
Cambridge Tech: It Dipped. They Bought.
An analyst upgrade sent Cambridge Technology Partners (Nasdaq:CATP - news) up 3-1/2 points on Monday. The gain extends an
impressive rebound since we profiled the stock three months ago in a Spotlight entitled "Bargain Growth Stock or Damaged Goods." Indeed, Cambridge Tech has more
than doubled from its low near $13 in October. What's behind this dramatic turnaround? In simple terms, many investors apparently saw a rare chance to buy a
fast-growing tech stock at a reasonable valuation.
At $28.50 as of Monday's close, the stock is still well off its 1998 peak above $58. Until last summer, Cambridge Technology Partners was an absolute darling of Wall
Street, but the mantra "What have you done for me lately?" was enforced with brutality thanks to a few disappointing quarterly reports and, worse yet, uncertainty about the
future.
Cambridge Tech develops and integrates enterprise-wide software applications, notably client-server and web-based applications. The company pioneered fixed-time,
fixed-price contracts, which appeal to businesses tired of paying computer consultants by the hour and then watching the open-ended tab balloon. The pricing concept
gained rapid acceptance as companies sought to reign in their information technology (IT) budgets. Many investors even thought the fixed-time, fixed-price feature would
insulate Cambridge's business from potential competition with Year 2000 compliance spending in IT budgets. It didn't.
Last year Cambridge indicated that a number of clients deferred or canceled strategic IT initiatives in favor of completing Year 2000 remediation activities. Cambridge also
faced increasing competition in specialty solutions.
In light of these developments, the sell-off in Cambridge Tech's stock price last year is hardly surprising. Indeed, prior to these troubles Cambridge's stellar performance
earned it an exceptionally high valuation, roughly 61 times 1998 earnings estimates at its peak, and when high-flying stocks like these hit turbulence they tend to crash back
to earth in flames. But with 75% carved out of its share price last fall, bargain hunters obviously felt the stock reached a point where the uncertainty was priced in, downside
risk was minimized and the upside potential was worth buying into.
Now that the stock has bounced to $28.50, is it still a bargain growth stock? The company is expected to report 40% earnings growth next week for all of 1998, 29% for
1999, and 40% over the next five years. The stock is trading at a Price/Earnings (P/E) ratio of 31 using 1998 earnings and 24.3 times 1999 estimates. The P/E is
comfortably below the projected growth rate, whereas the S&P 500 is trading at nearly 28 times 1999 earnings estimates with a mere 7% growth rate expected.
The fundamentals for Cambridge Tech's business remain strong. Many industry watchers are very keen on the market for systems integration services, particularly involving
client/server and web-centric applications.
The recent disappointments and uncertain outlook for Cambridge Tech's business between now and the Year 2000 is naturally going to detract from its valuation awarded
by the market. But even if it only comes close to the 40% expected growth rate over the next five years, there would seem to be some room for a continued re-expansion in
its earnings multiple. Even if it just maintains the current multiple, that kind of earnings growth (if it is achieved) is going to propel the stock price up nicely.
When the company reports earnings next week, investors should not only learn how the fourth quarter turned out, but get a clearer picture from Cambridge Tech as to how
the company is faring this year as 1999 IT budgets take shape. Then the dramatic rebound in this stock can either be justified or exposed as a dead-CATP bounce. |
