some notes from barrons on pfst esp. to your strong stomach <g>
By Eric J. Savitz
Something seriously strange happened last week at PeopleSoft. The
company, which sells pricey financial-management and human-resources
software, had been scheduled to give a talk last Tuesday at the BT Alex.
Brown tech conference in Baltimore. Monday night, a PeopleSoft exec
phoned James Moore, the Alex. Brown analyst who follows the company, to
cancel. Both Moore and PeopleSoft knew well what would happen if they
pulled out at the last minute: The stock would get crushed, especially since
PeopleSoft shares had already been under pressure. The Street has been
fretting about both a slowdown in PeopleSoft's growth rate and increasingly
aggressive competition from SAP, its arch-rival in the ERP, or
enterprise-resource-planning software market.
Nonetheless, PeopleSoft declined to come. It might not have been so bad if
the company's leaders had a reasonable excuse, but they didn't. PeopleSoft
just completed its third quarter, like every other company on a calendar year.
The presentation would have come exactly one week before this Tuesday's
scheduled earnings announcement. No doubt a significant fraction of the
presenting companies at the conference were in the same boat. Nonetheless,
PeopleSoft apparently feared the format of the presentation -- a short canned
talk, followed by a lengthy Q&A featuring queries that PeopleSoft had
received weeks earlier -- could lead to inappropriate disclosure of
market-sensitive information. Of course, the company knew both the date of
the meeting and the date on which it would report earnings, and still had
agreed to come. What changed the night before is hard to say. Certainly, it
looked suspicious to investors.
Perhaps all will become clear Tuesday, when PeopleSoft releases
third-quarter earnings. The Street expects profits of 17 cents a share, on
revenues of $340 million-plus. If they miss the numbers -- and most observers
expect them to be on target -- look out below. More important, says Moore,
will be the guidance PeopleSoft provides on both the fourth quarter and
1999. PeopleSoft -- watchers will be especially keen to see the company's
licensing revenue growth. Most observers expect year-to-year gains north of
40%. If the figure disappoints, the stock will dive.
Until Friday, when it rallied nicely, PeopleSoft's stock has been in full scale
retreat. It closed that day at 22 3/8, 86 cents below its price a week earlier.
In April, the shares peaked at about 55. The Street expects 1999 earnings of
90 cents a share, up an expected 34% from an estimated 67 cents this year.
The stock, which for many months traded at a frighteningly large earnings
multiple, now sports a P/E of about 22, just a tad ahead of the S&P's. But it's
growing far faster than the benchmark index.
Which makes you wonder if the stock has become a bargain. Well, maybe.
But PeopleSoft faces challenges that could hamper its progress for months to
come. For one thing, there's a growing suspicion on the Street that the slowing
growth in PeopleSoft's software licensing revenues relates to the winding
down of stepped-up demand related to corporate efforts to attack the Year
2000 problem. It can take as long as 18 months to roll out the kind of
complex programs offered by PeopleSoft, SAP, Baan and their ilk; the closer
we get to 2000, the less likely companies will be able to attack the problem
by installing new systems.
At the same time, it's unlikely demand for ERP systems will grow as quickly if
the economy slows. That's especially true at the financial, manufacturing and
technology companies, which make up a big slice of ERP customers. There's
also increasing evidence the market for big ERP systems is reaching a
saturation point -- that most large enterprises have them in place. Not least,
SAP reportedly has taken extraordinary steps to compete with PeopleSoft. In
some cases, Moore says, SAP has essentially agreed to allow new customers
to defer payment until the system is fully functional, a process that can take a
year or longer. With SAP on the attack, pricing has been under pressure.
Finally, PeopleSoft has compounded its own problems with the Street by its
stubborn refusal to provide information. Unlike other tech companies,
PeopleSoft doesn't hold quarterly conference calls with analysts; in fact, in
PeopleSoft's history it has held that kind of mass audience with investors just
once. That one, just a few weeks ago, left investors optimistic about
PeopleSoft's prospects. But the era of good feeling didn't last.
Brian Skiba, who tracks the stock for Lehman Brothers, is one of the few
remaining PeopleSoft bulls. He thinks the stock's slide has less to do with
fundamentals than with a devastating shift in investor psychology, and advises
loading up. But we tend to agree with Moore, who rates the stock "neutral,"
that it could be months before PeopleSoft can shake off the heavy burdens
that have been weighing on the shares. "Sure, it's cheap, if you have the
stomach to ride it out," Moore says. "But there are so many issues weighing
on the sector. There are all of these unknowns. There are very real risks for
everyone in the applications business right now." Moore recently lowered his
estimate on the three- to five-year growth forecast for the industry to 25%,
from 30%-35%. The industry, while still growing, has begun to mature. And
that's not good for PeopleSoft. |
