FreeMarkets takes hit on downgrades

Freemarkets (Nasdaq: FMKT) plunged 22 percent Tuesday despite beating fourth quarter estimates and boosting its outlook for the next quarter. Analysts found a few items to complain about in an otherwise strong quarter.

Shares were off $5.88 to $20.81. The business-to-business exchange company topped consensus analyst estimates in the fourth quarter and boosted projections for the first quarter Monday. Fourth quarter loss was $10.4 million, or 27 cents per share, excluding special charges. Analysts had predicted a loss of 31 cents per share on revenue of $31.2 million.

Two analysts downgraded the stock due to concerns about the online business-to-business auctioneer's key markets.

Auction volumes lower than expected

Auction volumes for the quarter were $3.5 billion, lower than most analysts estimates, which were in the $4-billion range.

Merrill Lynch analyst Edward McCabe said that though the company bested his revenue, gross margin, and EPS estimates, "light auction volume and in-line new customer additions in the quarter could be indicators that visibility and upside potential may be somewhat limited until economic conditions improve."

McCabe lowered his rating from "buy" to "accumulate" based on the lower volume in auctions and valuation metrics. "We think the company is positioned well long-term," he added.

Goldman Sachs analyst Jamie Friedman said the company met his revenue expectations, but other indicators were mixed. He downgraded the company to "market outperformer" from "buy," based on lower volumes.

Friedman blamed the lower volumes on two factors: the way in which volume figures are calculated, which means that the more money a buyer saves, the lower the volume, and a weakness in the automotive and manufacturing industries. "The high tech and energy sectors were strong and made up for some (but not all) of the weakness. Overall we believe that the weakness in automotive and manufacturing caused about $400 million in the shortfall," Friedman said.

Despite lowering his rating, Friedman raised revenue estimates to $175 million from $171 million and earnings to a loss of 73 from 75 cents a share for the upcoming quarter. He also moved up his break-even date to the first quarter of 2002, from the second quarter despite citing negative metrics.

J.P. Morgan analyst Jim Pettit also raised estimates and maintained his "buy" recommendation. He saw the glass on key metrics as half-full. "Though total auction volume grew less than expected management's ability to deliver discernible value in the form of real savings made up for the drop-off in total business conducted through the FreeMarkets pipeline," Pettit said in a report.

Broader economic slowdown?

Other metrics that may indicate the company is being affected by the economy's slowing growth include a deceleration in the customer count. Freemarkets customer count jumped from 84 to 100, but the growth rate slowed. Friedman attributed the decline to increased competition from software vendors.

Existing customers revenues also decreased to 20 percent from 24 percent in the third quarter and 34 percent in the second quarter. This may be due to the softening economy and Freemarket's focus in the slowing manufacturing segments, Friedman noted.

"Broader economic slowdowns in the auto and manufacturing industry, as well as a higher concentration of short-cycle technology clients were the primary causes for the volume decrease," said Pettit.

On a positive note, Pettit added that "FreeMarkets' ability to deliver incentive-triggering savings in the face of softer total auction volume validates the quality and liquidity of the system, even under slowing economic conditions."