Front-Office Software Stocks Leading ERP Group
SAP, Oracle, PeopleSoft and Baan. They're the big names in enterprise resource planning software, which helps companies run back-office tasks such as accounting, human resources and manufacturing.
But that doesn't mean they're still the top market performers. With the exception of Oracle, they're trailing lesser-known firms such as Siebel Systems and Legato Systems. These companies, and Oracle, sell front-office products. Front- office systems are any sales and marketing systems that touch customers.
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Back-office software firms are being hurt as companies rush to become Year 2000 compliant, analysts say. The money that's usually spent on their software is going toward upgrades for the millennium.
''Y2K conversions are taking away from spending on back- office software and I expect that to continue for the remainder of 1999,'' said George Tharakan, an analyst with Roxbury Capital Management in Santa Monica, Calif.
With less than 12 months to go, companies are finding that Y2K fixes are easier and less costly than buying a brand-new system.
''I think certainly Year 2000 had accelerated some purchases. The tailwind has turned into a headwind,'' said Jim Pickrel, an analyst with Hambrecht & Quist. ''That's some of the factor in the decline.''
SAP, which is known for its strength in financial software for the manufacturing industry, has been entering other areas, such as retail, utilities and government. But those areas have been dominated by PeopleSoft, which is now trying to target manufacturing companies, says analyst Ben Rose of Adams Harkness & Hill.
''This group of vendors has been selling into a reasonably narrow market: large manufacturing companies,'' H&Q's Pickrel said. ''They've needed to transition into a broader market or set of markets. That's always tricky to manage.''
Still, certain enterprise software makers have been lifting the group. It's rated No. 13 among IBD's 197 industry groups, based on six-month price performance. It was No. 60 three months ago.
Oracle is on a roll. It spent much of last year trying to recover from a slump in its share price after missing estimates for its November 1997 second quarter. The stock has run up 127% from its Oct. 8 intraday low and on Tuesday gapped up to a new high.
Morgan Stanley Dean Witter raised its target price on the database software firm to $58 from $43 and maintained its ''outperform'' rating. The stock, which has a 97 Earnings Per Share rating and a 96 Relative Strength, is trading just above 49.
Shares of the Redwood City, Calif.-based company had traded as low as 17 3/4 last year.
But PeopleSoft and SAP have been laggards. PeopleSoft is now trading about 58% off its mid-April high and SAP is 51% below its late-July peak.
Why is Oracle on a tear while its rivals are sagging?
''In terms of stock performance that's true,'' Hambrecht & Quist's Pickrel said. ''But in terms of market share in this business, Oracle's actually been slipping a bit. It's growing a little slower than the market as a whole.''
Instead, where the company's been doing well recently, analysts say, is in selling flagship database software - the building block of corporate systems.
''Oracle is seeing a resurgence in its database business due to the Internet,'' Tharakan said.
Michael Stanek, an analyst at Lehman Brothers, says only about 8% of Oracle's business is in back-office applications. ''A lot of people spend a lot of time worrying about (ERP software) at Oracle, but that's not the full story there,'' he said.
More than half of the company's business is in consulting, he says. And then there's its database business. When companies decide to sell products online, they need to get a database system - which should mean more dollars for Oracle.
The Street projects a 33% rise in net to $1.28 a share for the fiscal year ending in May and 20% to $1.54 in 2000, according to First Call.
Siebel Systems, a San Mateo, Calif.-based maker of sales and marketing software, has IBD's highest-possible EPS rating of 99. Relative Strength is a bullish 93. Though the company lost 3 cents a share in 1994, it earned a penny in 1995, 7 cents in 1996 and 25 cents in 1997.
Rose of Adams Harkness raised his rating on the stock to ''accumulate'' from ''market perform'' in October. ''We felt that there was a fear that the ERP vendors would take over the front- office space,'' he said, ''but we thought that was overstated.''
SAP, PeopleSoft and Baan have been slow to make front-office programs. They're focusing on back-office software, he says.
Last week, Rose cut his rating back to ''market perform,'' but that was based purely on valuation.
Analysts project a 104% jump in profit for 1998 to 51 cents a share and 39% to 71 cents this year. Sales have grown by more than 300% the past two years. The company is expected to report on Monday.
The stock cleared a seven-month base in mid-December. It shot up 97% in value last year and is now in new-high ground.
Palo Alto, Calif.-based Legato Systems has increased its earnings the past five years, and the Street expects net to rise 64% in '98 and 52% this year. The company makes network storage management software for clients such as Compaq, Oracle and Sun Microsystems.
Legato shares more than tripled in value last year. Profit growth has exceeded 62% the past four quarters.
On Wednesday, the company announced fourth-quarter net of 24 cents a share, a 140% jump from a year ago and 2 cents above estimates. For the full year, per-share earnings were 70 cents, a penny more than forecasts and 67% higher than last year.
Among other front-office software makers, shares of Clarify and Segue Software have been performing well also.
''It's a sign of a healthy market when more than one company can do well and I would submit that there are a number of companies experiencing growth in this area,'' Rose said.
Most analysts expect the back-office vendors to recover in 2000, but not without some struggle. SAP, PeopleSoft and Baan now mostly serve large companies. Once that market's been saturated, they'll need to try to target smaller companies.
''It'll be tough,'' Pickrel said. ''The big vendors have a lot of things going for them, such as awareness and budgets. But they may have to change their products a bit. Those differences will make it reasonably difficult, especially at the outset.''
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