Sapient stumbles on warning, analysts still support stock

Sapient (Nasdaq: SAPE) was off 26 percent Friday after its fourth-quarter warning, but was still faring well compared to competitors. Analysts remained upbeat on the stock.

Shares were down 3.94 to 11.13 Friday morning.

The company said revenue of $139 million is expected to be flat with the third quarter. Earnings are expected to be around 10 cents a share, 2 cents lower than the Street's consensus. Management attributed the shortfall to a continued fall-off with dot-com customers and to a lesser extent, slower spending among established enterprise clients.

How Sapient stacks up

Deutsche Banc Alex Brown analyst Mark D'Annolfo said despite this shortfall, Sapient is still "better positioned than others." He continued to rate it a "buy." The analyst added that Sapient remains the franchise player in the sector, and is attractive at anything below $13 per share.

Competitors such as iXL (Nasdaq: IIXL) and Razorfish (Nasdaq: RAZF), which was recently downgraded, are hovering around the $1 mark.

"We still consider Sapient the premier vendor in this battered sector. It is among the most profitable vendors in the group, with significant cash generation," said SG Cowen Securities Inc. analyst Moshe Katri. He maintained a "strong buy" rating and maintained his price target of $28 a share. Katri said that "given current valuations, and the temporary nature of the current IT spending freeze, we don't see a reason to downgrade our rating on Sapient."

Still going strong

Despite the shortfall, D'Annolfo saw several positives for the company: Sapient's shortfall was not as severe as competitors, its core business with enterprise customers posted healthy growth, turnover does not appear to be a problem and there are no collection problems.

D'Annolfo said that Sapient's success in whittling down revenue exposure to VC-backed dot-coms to about 5 percent of revenue in the fourth quarter, down from 9 percent in the third quarter, is a long-term positive. The company still needs to lower that percentage, analysts said.

Katri also found most metrics indicated the company is tracking in positive territory; it remained cash flow positive.

Katri also noted that percentage-wise, earnings shortfall was more significant than revenue shortfall, mostly reflecting lower utilization rates for the quarter (low-60 percent level vs. the previous quarter's 69 percent).

Though WR Hambrecht analyst Gregory Gore reduced his rating to "buy" from "strong buy," he also called this a "small miss" and noted that the company's core business grew, and operating margins remained strong.

The first quarter

Management also said it expects the following quarter, the first quarter of 2001, to be flat, before it experiences a gradual sequential acceleration in revenue growth.

"We tend to agree with Sapient's management that IT spending should resume by (the second half of 2001)," said Katri, who noted that not only has a potential fourth quarter earnings miss been factored into the market for Sapient and its compeitors -- it has also factored in a flat first quarter.

Goldman Sachs analyst Gregory Gould also maintained a "long-term attractive" rating on the stock and said the pre-announcement wasn't "much of a surprise."

"The shares appear to have hit their low, trading at about $10 in the aftermarket," Gould stated in his research note.