From Bloomberg: Year 2000 Companies Hit Rough Patch; Some See '98 Revival
New York, Nov. 13 (Bloomberg) -- Years before the arrival of the new millennium, investors are cooling to companies who offer fixes for the year 2000 computer bug. The slide has been fueled by disappointing sales at top code rewriters Viasoft Inc. and Peritus Software Services Inc. Investors wonder if companies will ever spend the $300 billion to $600 billion that research firms like Gartner Group forecast it will cost to rid systems worldwide of the year 2000 snafu.
"If this is a $300 billion problem," asked Jim Cullinan, who runs Robertson Stephens Emerging Growth Fund with $300 million in assets -- a far cry from May, when investments in Viasoft, Computer Horizons, Inc. and others accounted for 19 percent of his fund.
He isn't alone in dumping stocks. The Bloomberg Year 2000 index tumbled 17 percent from its Oct. 9 high, almost double the decline in the benchmark Russell 2000 index in the same period. Peritus fell 45 percent in that span, while Viasoft declined 31 percent.
Some investors see more declines through the end of the year. They reason others will be spooked by a lack of news. Big new contracts won't likely be announced before companies approve budgets for 1998.
Undeterred
"The fourth quarter's going to be very sloppy for a lot of these stocks," said Jeffrey Eglow, a partner at Highlander Capital Management in Parsippany, New Jersey, with $250 million in assets and a slew of year 2000 companies including top service provider Keane Inc.
Eglow has held on to most of his positions, many of which are still worth twice as much as when he bought them. He's using the decline to bolster holdings of companies like Compuware Corp. and Alydaar Software Corp.
"We know there's a problem," Eglow said, explaining why he's holding steadfast. "In the next quarter or two, you're going to see revenues that are tremendous."
After the latest round of disappointments, however, investors will be in a "show me" state of mind, said Cullinan of the Robert Stephens Emerging Growth Fund.
What it is
The simplest explanation of the year 2000 mess is this: Many computers read only the last two numbers in any year, while assuming the first two are always 19. When the year 2000 rolls around, many programs will see the "00" and suppose 1900, if they don't get snarled altogether.
It's easy to describe, not so easy to fix. The difficulty lies in finding and mending the millions of affected lines of code, often written decades ago.
Some programs require more extensive fixes than just making post-2000 dates comprehensible. For example, the number "99" often acts as an end-of-file command, and when encountered as a date, stops some programs cold.
Programmable computer chips that use time to measure the flow of oil, for example, must be taught to account for the century change. The list goes on.
For Reservations
Computer Sciences Corp., a software service company, estimates that every Fortune 1000 company will spend a minimum of $10 million on the problem.
Those with specialized systems find the problem more complex as they look into it. The Sabre Group, the biggest processor of airline reservations in the U.S., in recent months upped its year 2000 budget to between $70 million and $80 million from half that level.
Not surprisingly, sales of automated software tools and consulting services are surging, even if that rate of growth is not as fast as investors hoped.
Keane, which announced its 416th year 2000 contract this week, will bring in more year 2000 business this month than it did all last year, according to Brian Keane, president of the Boston-based firm.
Lofty Prices
The question for investors remains whether the increase in sales will ever match the ascent in year 2000 stocks.
For example, Information Management Resources Inc., which wires computer code to India for reprogramming, has a market multiple of 30 times 1998 earnings -- and that's after its shares fell 40 percent from July 14 high.
Such lofty valuations keep Edmund Blake, who manages $300 million for Pinnacle Associates and owns Keane shares, from buying other year 2000 stocks.
"At these multiples, most of the other companies have a little too much risk," Blake said.
Also weighing on the stocks is concern that some companies are finding the problems less daunting than expected.
General Motors Corp. moved forward its completion date for upgrading its computer systems by a month November 1998. GM won't disclose the cost of the project. Peter Bible, the company's chief accounting officer, said he didn't consider the cost material in relation to the $3.6 billion spent annually on computer technology. The cost, he said, "is less than you would think."
Some Stock Picks
Electronic Data Systems Corp., the world's largest computer services company, said recently that year 2000 work won't make up more than 10 percent of its revenue, or $1.4 billion based on last year's results.
Not all year 2000 companies have rich valuations, analysts say. They argue that the big computer consultants -- including EDS -- will report predictably good earnings for the next few years and carry reasonable valuations.
The services sector provides good stability," said Goldman Sachs & Co. analyst Greg Gould in a conference call to clients yesterday. "Earnings growth is accelerating."
His top pick is Automated Data Processing Inc., the payroll outsourcing company, which could snag business from customers unwilling to spend on upgrading their own systems.
Even Brian Keane sees some bargains among his rivals. In the past couple weeks, he added to holdings of Computer Task Group of Buffalo, New York.
His own stock, he hastens to add, is the cheapest of all.
-- Roger Madoff in the New York newsroom (212) 318-2315/lw |
