Here's a little poopy that was drooped in my mailbox on Year 2000 stocks....
Companies that will make money on solving the Y2K problem have just nine quarters to go until the deadline arrives. Gartner Group still projects total spending of $600 Billion dollars by corporate America on the solution. Just simple division means that approximately $66 Billion needs to be spent on average each quarter. For scale, consider that IBM only brings in $18 billion in a quarter. If Gartner Group is even remotely close to the right number,
this is a massive market mover.
Surely some of this money is showing up somewhere already isn't it?
Briefing believes the Y2K problem is real. We are even willing to accept the Gartner Group estimate as "in the ballpark." But if it is right, the spending must have started already. Corporate America just can't spend it all in Q4Y99. So it should start showing up on the radar screen as pumped up revenues and earnings of companies working on the problem.
With that in mind, we scanned the Briefing Y2K universe of 41 stocks for companies that are showing initial signs of the expected Y2K boom to come. Mindful of the fact that many Y2K gurus still feel that the "best is yet to come," we think it useful to start looking now, if you want to invest. Speculators may be comfortable investing in companies without a track record, but they should be watching revenue and earnings numbers closely. Any speculative
Y2K stock that doesn't have an established revenue and earnings trend in place by Q2Y98 is likely to be out of the running entirely.
Looking at Fundamentals
How to look for evidence of the coming Y2K boom? We choose a set of criteria against which every company in our Y2K universe was compared. These fundamental criteria were as follows:
iBeat earnings estimates for Q3 1997 (most recent quarter) iCurrent quarter profitable (no fair losing less than was expected) iHas at least one analyst following the firm (no fair using a company's own "estimates") iNo downward revision of estimates in the last 30 days (no fair lowering the bar at the last minute) iHad year-over-year Q3 revenue increases of 25% or higher (smaller than that and it is likely that Y2K is only a small part of the
company's business. For example Computer Associates, (CA) meets all the criteria except this one) iHas had four successive quarters of rising revenue (any percentage, as long as it is positive) iHas had four successive quarters of rising earnings (losses were allowed, except for current quarter)
These are steep hurdles for any stock (Microsoft and Intel can't meet these criteria), but in the Y2K world magnificent revenue and earnings curves are expected. Beating earnings estimates is required to justify the risk premium already built into the prices. Requiring an analyst following the stock eliminated only two public companies (Alydaar, ALYD and ConSyGen, CSGI).
Out of the Y2K universe, we came up with only four stocks that meet the above criteria. Surprisingly, they aren't what you might expect, at least, they aren't the "hot" Y2K stocks. In fact, they are all systems integrators, who license software tools from the "pure" Y2K companies. Is it possible that the tools companies, while enjoying good runs over the next two years, wind up handing the bulk of the business to the large systems integrators, who
actually perform the work? It's too early to tell, but it should be considered.
The winners are: Information Management Resources (IMRS), Complete Business Solutions (CBSL), Mastech (MAST), and Keane, Inc. (KEA). All of these companies are established businesses, with years of experience in systems integration and development, and all have established customer bases. None of them have businesses solely based on Y2K conversions, but all of them are currently emphasizing the Y2K side of their business. They all are likely to
obtain Y2K work from existing customers, and they have the opportunity for cross-selling to new Y2K customers. In fact, Y2K may turn out to be the best lead generator ever for these companies.
Here are the results of our search:
StockQ3 Rev MMRev. GrowthQ3 EarningsQ3 EstimatesEarnings GrowthIMRS23.0228%0.150.12275%CBSL29.433.6%0.250.1955%
MAST53.272.1%0.210.18163%KEA169.940.5%0.180.1780%
Earnings are per-share, estimates are Zacks, but all beat First Call estimates as well.
These stocks don't come cheap, however, as the next table shows. On the other hand, neither do most of the other Y2K stocks.
StockCurrent PEMarket Cap MMIMRS67.4432CBSL55.1377MAST93.6717KEA49.91,951
Of the pure Y2K stocks, two came close to making the list: Peritus (PTUS) and SEEC (SEEC). Both failed on the four consecutive rising earnings criteria, but met all others. SEEC earnings dropped sharply in current quarter, from 0.13 per share to 0.04 per share and Peritus showed flat earnings growth until the current quarter. Both of these companies have not had the revenue growth expected of them by analysts, although they beat current earnings
estimates. In fact, when asked in a recent conference call if the 1998 budgeting cycle would drive Peritus revenues as expected, CFO Alan Dreary stated "The only guarantee I can give is I've been wrong guessing the line for the last eight quarters, but I can't come close to predicting when it is going to hit."
Just how the Y2K market place will play out is hard to predict. One thing is certain however. The tidal wave of spending won't sneak up overnight. Forget all the hype surrounding the issue: the Y2K spending, whatever size it turns out to be, will show up on somebody's bottom line eventually, and it will appear in stages, as surprises. And the best place to look for it, is on the bottom line. |
