BEA Systems slips, but analysts remain upbeat

BEA Systems did everything a company could do--it topped estimates, maintained a strong outlook and delivered growth in a tough environment. But shares still fell Friday.

BEA (Nasdaq: BEAS) develops e-business software for a range of customers, including financial, communications and utilities companies. BEA has been viewed as one of the few bright spots in a down market. It didn't matter. Shares fell $2.06 to $39.87 in early trading. But the stock recovered considerably from a low of $36 in after-hours trading as Wall Street squabbled over a bullish round of analyst reports and the fact that BEA fell short of its "whisper" sales target, an unofficial estimate based on rumors.

The company topped analysts' estimates in its fourth quarter report Thursday, earning $43.6 million, or 10 cents a share, on sales of $256 million. Both numbers were well above the Street's consensus; First Call had pegged the company for a profit of 9 cents a share on sales of $251.8 million.

BEA also left its fiscal 2002 sales targets unchanged and raised its earnings estimate for the year--a remarkable feat considering the way its technology peers have been warning.

But the company got snagged on Wall Street's unofficial estimate--the whisper number. The whisper number on revenue had been around $265 million, according to Montgomery Securities analyst Greg Vogel.

Vogel also suggested investors were expecting BEA to raise projections. The company had said a lot of bullish things at analyst conferences, and "at that kind of valuation, it's safe to assume investors are expecting big things," he said.

But the whisper number was only partially to blame for BEA's slide Friday. A profit warning from Sun Microsystems (Nasdaq: SUNW), a BEA partner, the stock's high price, and economic problems worried investors. Despite those worries, analysts were upbeat.

License revenue strong

Many analysts suggested that BEA's growth in license revenue could more than make up for the whisper-number miss. BEA beat the $145 million in license revenues many analysts had expected, bringing in $158 million. License revenues are more important than other metrics since they indicate what's coming down the revenue pipe.

"While prior to the earnings release we did suggest that the company could report 75 percent year-over-year growth, we believe the much better-than-expected license/service mix more than made up for a total revenue line that may not have met the high end of expectations," Lehman Brothers analyst Neil Herman wrote.

Herman reiterated a "strong buy" rating on the stock and said he remains "obstinately bullish on BEA," due to license revenue growth. He also raised estimates and considers the stock his "single best idea."

UBS Warburg analyst Andrew Roskill upgraded the stock to "strong buy" from "buy" Friday on the license revenue figure. He also noted that operating margins significantly outpaced estimates even as the company continued to invest into the business with operating expenses coming in at $3 million above his forecast.

The Sun shadow

Some investors may be casting judgment on BEA based on Sun's profit warning, but wrongfully so, according to analysts.

"It's making people nervous," Vogel said of the Sun warning. But "there's not a direct correlation between the two companies' businesses," he added.

"While some factors, such as the overall movement of corporations to the Internet, are common drivers of the two companies, other factors potentially negatively impacting Sun should have not cause issues with BEA and, in fact, could actually be positives for BEA," Herman said.

Roskill also shrugged off concerns that Sun's warning or the general environment should get the stock down.

While Sun is suffering from excess hardware in the secondary market from failed dot-coms and excess capacity in large corporations that over bought during better times, BEA is in the clear because 80 percent of its software licenses are consumed immediately, Roskill noted.

"Furthermore, the company's products help its customers consolidate, rationalize and streamline operations," Roskill added, concluding that since products help lower operating costs, BEA should be able to navigate well even in an economic slowdown.

Merrill Lynch analyst Christopher Shilakes also shrugged concerns of the company's vulnerability to the downturn. He called the company a "BEAcon of Hope," maintaining an intermediate term "accumulate," and a "long term buy" on the stock.

"BEA's ability to court the developer community with trial downloads of cutting edge products should enable it to continue its revenue growth," he wrote.

Valuation

The other big concern for analysts was BEA's stock price. At current levels, BEA trades at around 100 times most analysts' fiscal 2002 earnings estimates. Despite concerns, most analysts were optimistic enough to maintain their price targets and ratings.

"Despite the company's dominant market position, the stock remains somewhat aggressively priced making it important to carefully pick an entry point," Vogel said. He revised his price target to $60 from $74.

"This stock is not cheap," ING Barings analyst George J. Godfrey wrote in a research note. The analyst maintained a "buy" rating and 12-month price target of $65, and said that if it wasn't for valuation concerns, he would have rated it a "strong buy."