NEW YORK (CNN/Money) -
Software investors seem to care a lot about war but not so much about war-nings.
How else to explain the big move in business software stocks Siebel Systems, Oracle and SAP (SAP: Research, Estimates)? Each stock surged at least 3 percent on Monday, even as the broad market rally fizzled. PeopleSoft was also trading higher most of the day but wound up losing 0.1 percent at the close.
But investors seem to be glossing over some bad news, most recently an earnings warning from Siebel Systems (SEBL: Research, Estimates). The company announced after the closing bell on Friday that many key deals were postponed during the first quarter due to concerns about the economy and the war (see more).
This warning came on the heels of a gloomy first quarter forecast from PeopleSoft (PSFT: Research, Estimates) on Thursday afternoon. And Oracle (ORCL: Research, Estimates), which reported its latest quarterly results last month, said that the near-term spending outlook was murky at best.
Bad news expected
Still, none of this mattered on Monday. Shares of Siebel gained 3.1 percent on Monday afternoon. What gives? "Everybody was prepped by Oracle's news a month ago," said David Hilal, an analyst with Friedman, Billings, Ramsey. "Expectations were going down."
So the bad news from Siebel and PeopleSoft was not exactly a huge surprise. And the stocks did take a hit on Friday following PeopleSoft's warning. PeopleSoft plunged 9 percent while Siebel tumbled 5 percent. Oracle and SAP each slipped more than 2 percent.
| * Based on prices as of 04/07 and estimates for this fiscal year | | Source: FirstCall |
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But were the stocks really oversold and due for a big pop? Shares of Oracle, SAP, PeopleSoft and SAP are still, even after Friday's fall, up an average of 35 percent since the Nasdaq's Oct. 9 low point. And the stocks aren't exactly cheap, especially when you consider the fundamentals.
Oracle, for example, is trading at 26.4 times earnings estimates for its next fiscal year (ending in May 2004) even though earnings are expected to increase less than 10 percent. And Siebel's valuation is particularly rich. Before Friday's earnings warning it was trading at 31 times 2003 estimates despite expectations of flat earnings growth. Now analysts are predicting an earnings decline for the year and the stock is trading at 36 times estimates.
"These software stocks are all overvalued on the fundamentals that we see today," said Richard Williams, strategist with Summit Analytic Partners, an independent research firm that focuses on software companies. He doesn't own shares of the stocks he follows and Summit does not have an investment banking business.
Buying binge after the war?
Apparently, investors are betting that earnings estimates for this year will eventually head higher, which would mean that the stocks aren't as expensive as they seem right now. The hope, according to Hilal, is that once the war is over, companies will begin spending once again. Deals that were postponed in March may wind up taking place later on during the year, he said.
"A lot of the shortfalls are being blamed on the onset of the war so investors are giving the software companies a pass this quarter," Hilal said. He does not own shares of PeopleSoft, Siebel, SAP or Oracle and his firm does not have any investment banking relationship with them.
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But it's not as if the economy is showing major signs of strength. The job market is still weak. March figures for the manufacturing sector were dismal. It seems a tad simplistic to assume that once the war ends, the economy, and business spending for that matter, is going to improve for the better in a hurry.
"It's premature to be able to gauge what's really happening with corporate demand," said Williams. "Long-term investors need to wait and get more data before making any decisions about these stocks."
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