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BMC bounces; analysts still see trouble ahead

    BMC Software (Nasdaq: BMCS), which provides software for mainframes, bounced Thursday after announcing its third quarter results would beat expectations. Analysts weren't so sure the company and its competitors are out of the woods yet.

    Shares were up 34 percent, or 5.37 to 21 at the opening bell.

    BMC announced last night that it expects to report earnings of between 20 and 22 cents a share for its third quarter, above the Street's consensus of 16 cents a share on slightly better revenue growth.

    Not out of the woods yet

    UBS Warburg analyst Kevin Buttigieg said that though BMC is due for a bounce from its current five-year low, it's not out of the woods yet. He maintained a "hold" rating and an $18 price target.

    He attributed the company's revenue upside to its mainframe business, and IBM's (NYSE: IBM) ability to exceed its planned amount of mainframes in December.

    "Longer-term, we're not confident in the secular demand trend for mainframes," Buttigieg said. He added that on the positive side, IBM should face fewer supply constraints in the March quarter, and called BMC's estimates for the quarter "realistic."

    "For us to gain more confidence in the stock we'd need to see that this quarter was more than a one-quarter mainframe rebound," Buttigieg added.

    According to the latest SG Cowen Securities computer industry survey, there is still no improvement in mainframe capacity demand, suggesting that it may take a few quarters for the rebound to come.

    SG Cowen analyst Drew Brosseau reiterated a "buy" but agreed that tough times are still ahead; he said the company faces another tough compare in March before IBM's new zSeries mainframe cycle.

    Brosseau also noted that IBM's delay in completing its new usage management software could cause shortfalls in future quarters.

    Boost for competitors?

    Analysts were mixed on what the news meant for Computer Associates (NYSE: CA) and Compuware (Nasdaq: CPWR).

    "We'd be cautious in assuming that ...mainframe strength can be extrapolated to Computer Associates and Compuware," said Buttigieg. He believes most of BMCS' revenue upside came from IBM's improvement in MIPS shipments, something that can't be correlated to both these stocks, he explained.

    ABN AMRO Inc. analyst Robert Johnson issued a bullish note on CA following BMC's announcement. Good news at BMC bodes well for Computer Associates, the analyst said, since the companies "compete in many of the same markets."

    He maintained his "buy" rating on CA and said that the BMC news would undoubtedly have a positive impact on the stock.

    It’s the economy

    Analysts also said that the economy, and not the BMC's fundamentals, would limit the stock's performance.

    "The slowing in the economy has raised questions about the strength in IT spending budgets in 2001. While budgets should still show solid growth, the pace will likely be slower than last year," Brousseau predicted.

    Brosseau also cited "generally sluggish mainframe capacity demand" as a challenge that will likely limit the rebound in top-line to the mid-teens."

    Wasserstein Perella analyst Stephen C. Dube also reiterated his "hold" rating on BMC despite the positive news, citing "a slowing economic environment."

    He expects shares to trade within a range of $15 to $25 per share.