ANALYST WATCH: Don't be hoodwinked by pseudo analysis

Believe it or not, a few analysts dared to upgrade or downgrade Intel and Apple ahead of next week's earnings reports. Right or wrong, at least they had the guts to make a call before everyone else plays Monday morning quarterback.

It's a funny little game most analysts and technology companies like to play ahead of their quarterly results. The companies hold these analyst conferences and offer tidbits almost invariably to guide expectations lower in the hopes of "dazzling" the Street when they beat estimates.

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When this happens, unless the company is Yahoo! or Dell, the stock makes a nice gain and the company rides some good press for a couple of days.

For their part, analysts like to look more informed than their counterparts at other firms. It's an inexact science. But when something as shocking as Oracle's stellar fourth quarter earnings happens, these guys find no shame in stating the obvious.

Tell us something we don't know

Back on June 15, Oracle did "beat" Street estimates by 4 cents a share, earning $527 million, or 36 cents a share, on sales of $2.94 billion.

While no analysts dared to raise estimates or upgrade the stock before the results hit the wire, no fewer than 10 firms upgraded the stock and raised earnings estimates the next day.

The stock quickly surged to $33 a share after trading at $25 and change the day before. Oracle shares are now hovering around $38 a share.

The first question to come to mind is why were these guys all so far off on their estimates and, by the way, what service are they really providing if they can only upgrade a bellwether tech stock like Oracle after everyone knows the score?

"There were a lot of indicators that were alternating between positive and negative last quarter with Oracle," said Marshall Leisten, an analyst at Dain Rauscher who immediately raised his rating from "buy" to "strong buy" after the earnings came out. "A company of this size is very tough to read. In fact, I led the bearish sentiment. But we were all very, very surprised by Oracle's licensing revenue in the quarter."

Thomas Berquist, an analyst at Piper Jaffray, said some of the blame does fall on the analysts who might have been duped a bit by Oracle's disappointing third-quarter results.

"Throughout the quarter, our checks were mostly negative," Berquist said. "We figured they were still a few quarters away. A lot of us got excited around November and December. After the March quarter, the disappointing licensing revenue and Y2K spending concerns forced a lot of us to go neutral on the stock."

Lies, damn lies and statistics

By all accounts, Oracle did have a lousy third quarter. It met lowered earnings estimates of 32 cents a share but its revenue of $2.08 billion was almost $200 million less than most analysts expected.

In fairness to the analysts covering Oracle, it is an enormous company. Its executives, particularly CEO Larry Ellison and CFO Ray Lane, are notorious for misleading analysts.

According to one Oracle watcher, Lane told analysts in May that "we don't know what's going to happen this quarter, but I promise you we won't beat 34 cents a share."

Ellison was quoted as saying "ERP is dead."

Naturally, these analysts scampered back to their offices, perused their charts and made a few calls before lowering their estimates.

When Oracle came in at 36 cents a share, most of these analysts promptly upgraded the stock to save face. That way, since most of these "insightful" upgrades are made before the opening bell, these guys can say they called the upgrade ahead of the pop.

Here's what Warburg Dillon Read analyst Andrew Roskill said after upgrading the stock from a "hold" to a "buy" and bumping his price target from $33 a share to $39 a share.

"There were literally no blemishes we could uncover in the quarter," Roskill wrote. "Our sense is, barring any technology sector correction, the stock is heading higher and we want to be on board."

Jump on board, Andy. You and everyone else.

Almost.

Bucking the trend

J.P. Morgan's Bill Epifanio resisted the temptation to follow the herd and held firm with his "market perform" rating. Epifanio gave credit to Oracle for making him look a bit like a fool, but he still says nothing fundamentally has changed to make this stock more attractive. At least not yet.

"The question is: how sustainable is this," Epifanio said. "The fact remains that despite their rosy outlook for the first quarter, the database market is only supposed to grow 15 percent. Last quarter, Oracle's database sales improved 25 percent. Its ERP sales were up 7 percent while the rest of the market was negative."

Epifanio said Oracle is to blame for its lack of visibility, especially from the top dogs that should know better. It's also famous for a company policy that virtually guarantees a huge surge in sales in the last few weeks of the quarter during the company's quiet period.

"They also enjoyed some bleed from the third quarter, maybe as much as $100 million, and historically they squeeze their first quarter to make their fourth quarter and year-end results look better," he said.

Bottom line: It's more important to take note of upgrades or estimate adjustments ahead of an earnings report. Sadly, that rarely happens.

Even if BancBoston Robertson Stephens is wrong about upgrading Apple this week, which seems unlikely, you have to respect the timing of the call.

Software analysts make their picks

After talking with all three of these Oracle analysts, it only seems fair to give them a chance to show us their stuff. Inter@ctive Investor asked each analyst to pick the one stock they would recommend from the companies they follow.

Piper Jaffray's Thomas Berquist loves Concur Technologies Inc. (Nasdaq: CNQR) at 38 and change Friday afternoon. Concur, which went public in December, develops Intranet-based employee-facing applications that extend automation to employees throughout the enterprise and to partners, vendors and service providers.

It fell below $28 a share earlier this month after peaking at 59 1/4 in April.

Dain Rauscher's Marshall Leisten picked BEA Systems Inc. (Nasdaq: BEAS) at 27 1/2.

BEA develops cross-platform middleware and application server solutions for enterprise applications.

Its shares hit a 52-week high of 29 in late June after bottoming out at 8 11/16 in December.

J.P. Morgan's Bill Epifanio selected Microsoft Corp. (Nasdaq: MSFT) which was trading at 92 and change Friday afternoon.

It shot up to 95 5/8 shortly after its 2-for-1 split in March before spending much of the past three months hovering around $80 a share. It was trading at a low of 43 7/8 in October.

Along with cranking out an occasional piece of software here and there, Microsoft spends a great deal of time in court.