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Trouble ahead for software stocks

Software stocks struggle as a trio of brokerages sound warning bells about giants such as Oracle, Siebel and BEA Systems.

Software stocks struggled Friday as a trio of brokerages sounded warning bells about giants such as Oracle, Siebel and BEA Systems.

"Estimating results has been like catching a falling knife this year, and we do not believe Street estimates yet capture the magnitude of capital spending constraints, particularly considering anecdotal data coming out of Europe," said Rick Sherlund, softare analyst at Goldman Sachs.

In a separate report released Friday, Merrill Lynch's software analyst team wrote that there could be yet another correction in store for software stocks.

"Can we conclude that software stocks are attractively valued again? The answer is: not really," the team wrote. "On the one hand, price-to-sales valuations have returned to historical norms. This could be regarded as a positive data point implying that software stocks have bottomed out."

But price-to-earnings ratios remain high "even by bubble standards," Merrill Lynch said.

Oracle shares were off 24 cents to $15.75, Siebel fell $2.39 to $27.38 and BEA lost $1.04 to $19.18 in morning trading.

Sherlund lowered earnings estimates for Oracle from 48 cents per share to 46 cents per share for fiscal 2002. He predicted database-server growth would drop 5 percent for the August quarter and show weak growth in the future.

For Siebel, he lowered earnings-per-share estimates for 2001 from 60 cents to 56 cents, and dropped 2002 estimates from 70 cents per share to 60 cents per share.

"Growth rates have been very high in the past, and the tight spending environment will likely have a more pronounced impact on their results," he wrote.

Meanwhile, Credit Suisse First Boston analyst Wendell Laidley became the latest analyst to lower his estimates on BEA, saying the company's backlog of orders "may be insufficient to weather the length of the economic slowdown."

Laidley said he was confident in BEA's ability to meet its second-quarter estimates when it reports Aug. 14, but said he has become "increasingly concerned about BEA's ability" to meet his third- and fourth-quarter sequential revenue-growth projections of 12 percent and 14 percent, respectively.

Beyond the backlog issue, Laidley expressed concerns about the company's assumptions regarding the economy, noting that "we believe from recent conversations with management that BEA's guidance for (fiscal 2002) was determined based on the belief that IT spending would grow 6 percent in 2001," a figure he now considers "too aggressive."

He dropped third-quarter revenue estimates from $311 million to $292 million, and dropped third-quarter earnings-per-share predictions from 11 cents to 10 cents. Fourth-quarter revenue estimates were dropped from $354 million to $306 million, and earnings-per-share predictions were lowered from 13 cents to 11 cents.

He also dropped his 12-month price target to $29 from $49.