2HRS2GO: CA investors regain confidence

3 min read

You know your stock has hit a bottom when you tell Wall Street profits will fall short of the consensus forecast -- and shares go up the next day.

Computer Associates (NYSE: CA) came, it saw lower-than-expected profits, and its stock is conquering today. CA shares fell at the open, but bounced back quickly to gain roughly 10 percent by early afternoon.

It's an amazing performance considering the company yesterday issued its second earnings caution -- third if you count the count the two warnings in the company's July preannouncement -- in two quarters. The mainframe software business that still generates a large portion of CA's revenue remained weak throughout the summer.

As has Computer Associates stock. Several observers point out that CA shares never fully recovered from their plunge in early July. The Street was poised for bad news all along, and when it finally came last night, it wasn't the worst case scenario that people were planning on.

CA's latest financial shortfall also might not be its own fault. International revenue comprised more than 30 percent of the company's business in the first quarter, so the euro's ongoing weakness probably hit CA harder than many tech companies. But no one can control currency fluctuations.

Maybe that's why Computer Associates CEO Sanjay Kumar remained "pleased" with preliminary second quarter results, in spite of the revenue and earnings miss. Forget low expectations -- Wall Street apparently had no expectations at all regarding CA.

Some folks probably wouldn't mind if CA stayed on a depressing track. Computer Associates seems to inspire strong feelings among enterprise IT departments.

But you can't get away from CA even if you tried, if for no other reason than whatever CA alternative you're going to buy might fall victim to CA's neverending acquisition strategy.

That kind of ubiquity guarantees CA isn't going to go away anytime soon. And optimists could argue CA is a bargain at the moment, even factoring in today's gains. At its price of 27.8125 as of 1:24 p.m Eastern time, Computer Associates is valued at less than 11 times estimated earnings for this fiscal year. That's about as cheap as it gets for an established technology firm, especially one that expects to report a 30 percent sequential improvement in revenue.

CA also has a potential growth catalyst, in the form of a revamped server line rolled out rolled out this week by IBM (NYSE: IBM), including mainframes redone as e-commerce servers and a price structure more palatable to Internet businesses. CA, BMC Software (Nasdaq: BMCS), Compuware (Nasdaq: CPWR) blamed uncertainty about the changes to IBM's System/390 mainframes for depressing their business; that concern has now been lifted.

A turnaround in market sentiment also helps. IBM stock was beaten down yesterday despite the zSeries introduction, but Big Blue's stock regained some ground today, amid a mild comeback for the technology sector after days of retreating.

Investors seem to be solidly behind CA's optimism: Reuters reports heavy sales (as opposed to buying) of put options, which protect against a sudden decline in a stock's price.

It might be too early to say for certain that CA will return to its halcyon days of growth. But at least no one seems to be believe it will get any worse. 22GO>