NEW YORK (CNN/Money) -
Sometimes, bad things happen to good stocks.
Take Veritas Software. Shares are down 24 percent year-to-date, making it the fourth worst performing tech stock in the S&P 500.
But the company is the second largest player in the hot market of storage software. The majority of Veritas's sales come from software that is used by corporations for data backup, protection and recovery. Earnings are expected to increase 16 percent this year and another 16 percent in 2005.
And according to a recent report by tech research firm IDC, Veritas's storage software sales growth of 21 percent in the fourth quarter outpaced the overall market's increase of 17.7 percent.
What's not to love?
Well, Veritas has taken the Nestea plunge because of two things that usually spook investors (and rightfully so): accounting concerns and an earnings warning.
But investors appear to have overreacted in the case of Veritas.
The Scarlet E
The company announced in March that it found some accounting problems in an internal audit. As a result, Veritas restated sales and earnings results for 2001 and 2002.
In addition, the company said it would delay the filing of its 2003 annual report with the Securities and Exchange Commission.
For that reason, Veritas (VRTSE: Research, Estimates), which usually trades under the ticker symbol VRTS, has been branded with an extra E. That scarlet letter will be removed once the company files its 2003 report. The company should shed some light on when that will be on Wednesday when it reports first-quarter results.
The restatements so far are relatively tiny. The company said it expects revenues for 2001 to be reduced by $1 million to $5 million and that the restatement would lower 2002 sales by $5 million to $10 million. To put that in perspective, Veritas reported sales of $1.49 billion in 2001 and $1.51 billion in 2002.
John DiFucci, an analyst with Bear Stearns, said he does not think that the accounting irregularities are "the tip of the iceberg." In addition, he noted, the chief financial officer who was around for the period when most of the accounting problems took place resigned in October 2002.
"[The restatement] appears to be a reflection of Veritas wanting to maintain a higher level of corporate governance," DiFucci said. "I do think Veritas is a well run and well managed company." DiFucci does not own the stock and Bear Stearns does not have an investment banking relationship with the company.
It's also worth noting that short sellers aren't swarming. As of March 15, about 12.3 million shares, or just 2.9 percent of the available float, were being held short.
Veritas' accounting issues seem relatively minor when compared to what's going on with Computer Associates, a competitor whose shares are down just 5 percent this year.
CA has been the subject of a long-time federal criminal probe into its accounting practices. The company fired nine employees earlier this week as a result of an internal investigation of the accounting woes, and on Wednesday CA chairman and chief executive officer Sanjay Kumar stepped down from those roles as a result of the scandal. (see more)
EMC earnings good news for Veritas
Assuming the accounting issues are put to rest -- of course, there's no guarantee -- investors still have to weigh the significance of the warning in January, when the company indicated that it expected to see seasonal softness during the first quarter.
Despite the warning, Veritas is expected to post a sales increase of 19 percent in the first quarter and earnings growth of 23 percent.
Analysts are taking the results of rival EMC -- the No. 1 company in storage -- as a good sign for Veritas. EMC (EMC: Research, Estimates) last week reported better than expected first-quarter sales and earnings and said that second-quarter sales should be higher than forecasts.
As a result, analyst Gary Abbott of Merriman Curhan Ford, thinks Veritas will beat the consensus estimates of 21 cents a share in earnings and $470 million in sales.
"This is still one of the best software companies out there," said Abbott.
As for price, Veritas isn't cheap at about 30 times 2004 earnings estimates, though it is a discount to EMC's P/E of 36. Shares of EMC have fallen just 2 percent this year.
Mark Kelleher, an analyst with Adams, Harkness & Hill, said that as long as Veritas can prove that EMC's success is not an anomaly and report a strong quarter of its own, then investors would be willing to once again pay a higher multiple for the stock.
He also thinks that once the company files its 2003 annual report with the SEC, and assuming there are no bombshells in it, investors will probably breathe a sigh of relief.
"Once you can take the 'E' off the stock that will allow more investors to get back in," Kelleher said.
Analysts quoted in this story do not own shares of any of the stocks mentioned and their firms have no investment banking relationships with any of the companies.
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