ANALYST WATCH: PeopleSoft enjoys last laugh

PeopleSoft gave analysts and its fickle investors some encouraging news this week when it not only beat estimates in its first quarter, but left its sales and earnings targets for 2001 unchanged.

It turns out that the cautious outlook the company gave back in January--which sent the stock into a bit of a tailspin--was right on the mark. In fact, those estimates now look pretty damn good considering the problems so many other software companies are facing these days.

In the quarter, the enterprise software developer pocketed $36 million, or 11 cents a share, on sales of $503 million, beating the consensus estimate by 2 cents a share and $37 million, respectively.

It didn't take long for analysts to do some serious backpedaling; Morgan Stanley Dean Witter, Goldman Sachs and CS First Boston all upgraded the stock following the impressive quarterly results.

Goldman Sachs analyst Rick Sherlund upgraded PeopleSoft from a "market outperform" rating to his firm's "recommended list." Keep in mind that back in late February, Sherlund and Banc of America Securities analyst Bob Austrian cut their sales estimates for PeopleSoft this year mainly in response to the moribund economy.

Here's what Sherlund had to say Thursday:

"In the current economic environment PeopleSoft has regained its former status as a preferred vendor with a broad Internet-based product portfolio, broad geographic region and vertical market coverage, a recognized brand name, and strong financial position," he wrote in a research note.

Sherlund went on to say that enterprise application companies are performing the best in the sector, and PeopleSoft is performing the best within that group. He also noted that the company does not appear to be shedding resources or costs like most other vendors.

Morgan Stanley Dean Witter analyst Charles Phillips also changed his tune, upgrading the stock from a "neutral" rating to a "strong buy."

Phillips played a role in driving PeopleSoft's shares lower back in January when he cut the stock from an "outperform" rating to "neutral" even though the company had just topped analysts' sales and earnings targets for the fourth quarter and did not revise its guidance for the first quarter.

At the time, Phillips said the downgrade was based on share price and an expectation that sales growth for the rest of this year wouldn't match the company's impressive pace in the prior six months.

PeopleSoft shares fell 10 percent the day after it reported those impressive numbers. Considering the rapidly deteriorating economy, PeopleSoft shares should have been rewarded with a healthy bounce.

But it didn't happen.

CS First Boston analyst Brent Thill upgraded the stock from a "hold" to a "buy" Thursday. At least he admitted that perhaps the woes of other software companies seduced by the dot-com madness and the rush to embrace business-to-business applications shouldn't have been held against PeopleSoft.

"PeopleSoft turned on the Q1 afterburners to scream by the carnage of multiple software earning wrecks," Thill wrote in a research note. "Key to the company's success this quarter and over the past year is delivering software that lives up to its marketing pitch. Many of the competitors still haven't lived up to the fancy slides in their PowerPoint presentations."

All this brings us back to the essential point: PeopleSoft never got the huge stock run-up that Oracle, Siebel Systems (Nasdaq: SEBL) and countless other B2B software firms enjoyed because it stuck to its business plan and didn't go chasing after the dot-com buck.

Laura Lederman, an analyst at William Blair & Co., didn't have to react to PeopleSoft's great news by upgrading the stock because she already had a "buy" rating on it and, frankly, couldn't understand how some of her peers justified their lukewarm-to-cool opinions on the stock.

"The main reason PeopleSoft didn't miss this quarter is because it wasn't caught up in all that B2B (stuff)," she said. "I don't need to upgrade the stock because I never told people to sell it like others did. They said they were going to reaffirm their guidance and they did."

Lehman Brothers analyst Neil Herman was another PeopleSoft analyst who could relax and take pride in the fact that he rates the stock a "strong buy" and didn't lower his rating while others took the safe route.

PeopleSoft Chief Executive Officer Craig Conway told analysts this week that while his company isn't immune to the macroeconomic slowdown, it still expects to see license sales growth of 35 percent this year and a profit of between 55 cents and 60 cents a share.

"But we feel our original guidance was conservative when we made it," he said. "We forecast [license] growth of 30 percent to 35 percent at the beginning of the year, which is exactly what many of our competitors are coming down to now."

PeopleSoft shares shot up 22 percent Thursday to close at $36.62, well off its 52-week high of $53.88 set in January.

Loyal PeopleSoft shareholders can take some solace in the fact that by simply reaffirming guidance for the fiscal year (something that surely would have hammered the stock just a year ago), PeopleSoft is finally getting some respect for sticking to its guns and telling investors the truth rather than what they wanted to hear.

Better late than never.