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2HRS2GO: Time for BMC to rise

    You beat down BMC Software (Nasdaq: BMCS) as expected.

    Now you can pick it up again.

    Have an opinion on this?

    Investors are understandably disappointed to hear the business software vendor's fiscal second quarter results will come in at the low end of analyst forecasts. Shares are down almost 12 percent today.

    But this quarter's shortfall probably won't happen again soon. Merrill Lynch and Donaldson, Lufkin & Jenrette reiterated "buy" ratings on the stock this morning. "We would view any pullback in BMCS as a buying opportunity given the company exceeded revenue expectations for the quarter and was only marginally below our earnings estimate on extraordinary expense items," Merrill Lynch's Chris Shilakes and Peter Goldmacher note in this morning's research note.

    In a way, yesterday's news should actually strengthen faith in BMC's executive team. "We are doubtful that these results warranted a pre announcement, but we think this speaks to management's pro-active approach to dealing with the financial community," write Shilakes and Goldmacher.

    Look at things from an absolute point of view. BMC's balance sheet remains strong, with cash growing and deferred revenues falling. The company see second quarter revenue of at least $410 million, which represents 40 percent year-over-year growth. Earnings will rise 18 to 24 percent. And executives "remain comfortable with" (read: we'll top) analyst estimates for the third quarter; in fact, BMC may top the current forecasts by a considerable margin, since it expects to close the "one or two" big contracts that didn't come off in the second.

    "We didn't lose any transactions," CEO Max Watson said during yesterday's conference call. "Those deals aren't going away."

    As Oracle shareholders can testify and Network Associates investors found out earlier this year, the nature of enterprise software sales almost guarantees the occasional quarterly miss, because big corporations don't sign contracts until the final weeks of the quarter. It's especially true with the mega deals involving mainframe systems.

    BMC's problem was in Europe, a continuing area of weakness as BMC has integrated sales forces from acquired companies Boole & Babbage and New Dimensions Software. Fortunately, that integration process is largely over.

    Perhaps investors simply used the second quarter earnings as an excuse for profit-taking. Fine, but all the factors that convinced the market to drive BMC higher remain the same. The growth of e-commerce has re-ignited demand for mainframe management software, because Big Iron sits the the core of many corporate networks. BMC's competitive position remains healthy, especially now that Platinum has been absorbed into Computer Associates.

    A valuation perspective affirms BMC's solidity. The stock rose 143 percent between mid-April and yesterday -- and earnings growth has been so strong that shares were still trading at just 28 times next year's estimated earnings. Compare that to the likes of Oracle, Siebel or almost any other enterprise software vendor, and see which looks like a better value.

    Among BMC's chief rivals, Computer Associates carries a lower valution. But BMC's growth prospects are stronger; First Call's consensus estimate for the next fiscal year sees 17 percent growth for the former versus 25 percent for the latter.

    Today's action has driven BMC down to 25 times estimated fiscal 2001 earnings. Think of it as a chance for believers to reaffirm their faith at a cheaper price.

    Other issues:

  • 24/7 Media
  • (Nasdaq: TFSM) CE Unterberg Towbin analyst Tara Long downgrades this online ad specialist to "long-term buy" less than two weeks after starting coverage with a "buy" rating. "We are changing our rating ... based on valuation," Long writes in a research note released this morning.

    She has a point. Shares of 24/7 have zoomed from 32 to the mid-40s since late September, but haven't been north of 50 since Web stock euphoria peaked in April. It usually takes an industrywide shift in sentiment or major corporate news to break those trading ceilings.

  • Advanced Micro Devices
  • (NYSE: AMD) Talk about being skeptical: AMD beats expectations by 25 percent, says it still expects to meet its original goals for year, and the stock drops today. Maybe it's because AMD still insists on doing stupid things, like going with its own 64-bit standard.

    Memo to AMD: Remember Alpha, if for no other reason than no one else does.

  • Barnes & Noble
  • (NYSE: BKS) No one can blame shareholders for being annoyed about the huge payday struck by CEO Leonard Riggio. There's nothing illegal about Barnes & Noble buying Riggio's other company, but the strategic rationale seems ephemeral. Babbage's to strengthen Please.

    It's hard to see how 495 physical retail stores and a fledgling website do much to strengthen either Barnes & Noble or its Web sibling. A distribution partnership could have accomplished the same goals as this acquisition, while avoiding the appearance of a conflict of interest. 22GO>