PSFT featured on Smartmoney interactive yesterday. Maybe that helped today.
August 20, 1998
DAILY SCREEN ARCHIVE
SAFETY IN SOFTWARE
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PEOPLESOFTTHE MARKET for enterprise software has been a brilliant one in the past year. Along with peripherals, the sector has returned 47%, sheltering investors in companies such as Microsoft (MSFT) and The Learning Company (TLC) from the mess in semiconductors. Even amidst the ups and down in the past week or so, our sector tracking applet reveals the software stocks have been up in the past five days by 5.9%, ahead of the networking equipment vendors and just slightly behind the computer equipment guys, led by highflyers such as Dell Computer (DELL).
A large part of that growth is thanks to stunning performers like PeopleSoft (PSFT). Though PeopleSoft is down by 20% in the past six months, the Pleasanton, Calif.-based vendor of manufacturing software was a terrific stock to own in the past five years, multiplying seven times since its IPO in 1993.
PeopleSoft, and the companies it competes with, such as Oracle (ORCL) and SAP AG (SAP), the German software giant whose American depositary receipts started trading on the New York Stock Exchange this month, have continually turned in great results in past years, thanks to large companies seeking to streamline their internal business operations.
PeopleSoft surprised the Street by a penny in its latest quarter, closed July 21, just as it has for many years, and the consensus estimate for earnings per share this year, as reported by First Call, has been revised upward to 66 cents for the year from 65. The stunning year-over-year results for PeopleSoft (its earnings per share are up 66%, 85%, and 88%, year-over-year, in the past three quarters) did a lot for the stock's momentum earlier in the year: It was up as high as 52 back in March.
The surprise is less that the stock is down at 33 these days, than that it got so high in the first place. PeopleSoft is an excellent company, to be sure, but at a forward P/E of about 50, it leaves many other decent software companies in the dust. Frankly, if you're looking to pick up some cheapy values, you'd do better buying into Oracle, which, trading at 21 times projected earnings this year of $1.15, is pretty darned inexpensive compared to the rest of the sector.
Nonetheless, we certainly would wish PSFT's shareholders nothing but good growth, and the reasons for the stock's fall are intriguing. They signal that in a time of Asian jitters and the impending millennium, investors worry if companies will really keep buying this expensive stuff.
PeopleSoft is part of a large but obscure market known as enterprise resource planning, consisting of software tools designed to automate and optimize the many internal operations of large corporations. Copies of its software, used to streamline office procedures such as accounts receivable and managing the manufacturing process, sell for $1 million or more on average. PeopleSoft's applications can tell a company down to the individual part number how much of a raw material it has in its warehouses, which can be useful if a company is trying to shift to just-in-time manufacturing.
Analysts believe the company is, in fact, stealing share from competitors. Eric Upin with BancAmerica Robertson Stephens cites PeopleSoft's 74% year-over-year revenue growth in the latest quarter as evidence the company is gaining an edge. The company's growth compares to an average 60% growth rate for SAP. Clearly, some of that growth is coming from increases in the service and support side of the business, which might cause one concern, given that service revenues often have lower margins than those of software. PeopleSoft's license revenue grew 53% in the recent quarter, compared to 97% growth for services, year-over-year, and services are now the bulk of revenue.
Obviously, software that costs a million bucks or more is a large sale and these kinds of programs are a major production to get up and running. For example, Sun Microsystems (SUNW) recently put in place a series of applications from Oracle meant to streamline its operating expenses, and the move represented a huge investment in time and money, even though it's supposed to help Sun conserve resources down the road.
Analyst Brian Skiba with Lehman Brothers says he thinks institutional investors have become skittish about how many more of those million-dollar contracts businesses will buy, and, interestingly, the reason is Compuware (CPWR), another stock on our screen today. Compuware's software development tools, called Unify, have proved important for fixing the Y2K bug, and that's apparently been a large factor in giving CPWR an impressive return of 80% in the last year. Now though, Skiba says the market is worried Y2K spending will accelerate among the large companies, and that when it does, it will push out spending on PeopleSoft apps, a lessor priority for businesses.
"There's a lot of anxiety, in the near term, over what Y2K brings to [PeopleSoft and its competitors], because people expect there'll be some spending displacement in the second half of '98 and the first half of '99."
Reports from CDA do show some significant and interesting institutional selling. While an organization such as Calpers (or the California Public Employee Retirement System) is standing pat with its 854,000 shares, as is Ford Foundation, insurer Cigna and the University of Texas have dropped hundreds of thousands of shares in the past month or so. About 18 different institutional shareholders dumped 100% of their positions in the past couple of months, according to CDA. Institutional investors represent about 54% of PeopleSoft stock, according to the report. As you'd imagine, representatives from most major shareholders were unavailable for comment on the stock.
Skiba says a support level might be 30 for the stock, but "this may not be the bottom here." Nonetheless, Skiba thinks the stock's 12-month target is 70, based on increasing overseas sales and the company's move into new "vertical markets." For example, PeopleSoft recently introduced versions of its software targeted at the insurance industry.
That said, PeopleSoft looks like an excellent company with expanding horizons. If you can find a fund manager, beat him or her up about the company's prospects. In the meantime, you can fret over long-term economic conditions. But if the stock is going to trade much lower than today's close of 33 5/8, it probably won't do so because of any fundamental weakness on the part of the company or its business going into this next quarter. That suggests the current drop is a good smokescreen in which to pick up some shares.
-- By Tiernan Ray
Regards
Neil |
