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2HRS2GO: Windchill warms Parametric

    Parametric Technology (Nasdaq: PMTC) shareholders must be loving life today.

    Shares of the software vendor rose more than 24 percent this morning as message boards buzzed with rumors of a buyout. Not being a arbitrageur, I neither know nor care if it's going to happen, but if you believe growing sentiment among research firms, Parametric merits attention as a longer-term investment anyway.



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    SoundView Technology Group's Russ Crabs and associate John Cregan became the latest analysts to raise their expectations for Parametric. Crabs and Cregan today upgraded Parametric to a "strong buy" from a "hold" rating and set a price target of $38 for PMTC.

    Their report joins a recent chorus of positive comments, including at least four upgrades from brokerages last month. According to Zack's Investment Research, 10 of 12 analysts following Parametric have some kind of "buy" rating on the stock.

    The SoundView analysts see Parametric going from Mr. Ed to Secretariat. "For the past five quarters, PMTC has been transforming itself from a one-trick pony to a potential E-commerce thoroughbred," Crabs and Cregan write.

    Parametric's one-trick was mechanical design software, which still generates the bulk (almost 76 percent in the latest quarter completed) of the company's revenue. SoundView expects little from that core business: "We still expect flat growth in this business for F00."

    But Parametric's future growth engine comes with its Windchill software, which uses the Web to handle supply chains for product development. Meaning it's basically a take on the popular investment catchphrase of the day, business-to-business e-commerce. Windchill's combined license and service revenue increased to $40 million -- a terrific sequential gain of 60 percent -- in the company's fiscal fourth quarter.

    The performance hasn't been reflected in Parametric's stock price, especially compared to other e-business players.

    SoundView's selection of notable B2B e-commerce companies -- Ariba (Nasdaq: ARBA), Agile Software, Aspect Development (Nasdaq: ASDV), Broadvision (Nasdaq: BVSN), I2 Technologies (Nasdaq: ITWO) and Vignette (Nasdaq: VIGN) -- yields an average multiple of 45 times estimated 2000 revenue. Windchill's focus on the product development end of things provides a slightly narrower focus than broader B2B e-commerce products from companies like Ariba, but there are some comparable firms, notably Agile Software (Nasdaq: AGIL), which also targets Web-based exchanges of product information between manufacturing firms.

    Agile's market cap of $2.7 billion (at least before SoundView's report was published; the stock is up more than 9 percent today) equates to a multiple of 78 times estimated 2000 revenue.

    Crabs and Cregan estimate Windchill will product $270 million for Parametric this year and $285 million in calender 2000. The analysts apply a multiple of 25 times (or much lower than the aforementioned 45x average) estimated calender 2000 revenue for Windchill, and assume design software companies' historical multiple of 3 times revenue for the rest of Parametric's business.

    That total yields a market cap of $10.2 billion, or $38 per share. As always, take actual price targets with a hefty grain of salt. "Valuation is more art than science," the SoundView pair notes.

    But whatever the actual price should be, Parametric's e-business component certainly remains relatively unrecognized, even though Windchill generates far more revenue than many pure play B2B companies. Perhaps the Aribas and Agiles are overvalued, but it's easier to push one stock higher than an entire industry lower.

    Not that Parametric doesn't deserve some skepticism. The company earned its slide this year. Shifting the design software business to more of a broad approach (away from merely individual products) produced a longer sales cycle than the company expected, resulting in a third quarter shortfall. The CAD business can hardly be described as a growth field, so the market has understandably shied away from Parametric.

    But this isn't just a CAD company anymore.

    Other issues:

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