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2HRS2GO: ERP stocks ready to bounce back

Low expectations can be so helpful.

That's some of the method behind Advest Inc.'s bout of upgrade madness today. The Chicago-based firm raised ratings on a quartet of stocks: Mapics Inc. (Nasdaq: MAPX), to a "strong buy" from "market perform"; Symix Systems (Nasdaq: SYMX), to "strong buy" from "buy"; Transaction Systems Architects Inc. (Nasdaq: TSAI), also to "strong buy" from "buy"; and QRS Corp. (Nasdaq: QRSI), ditto.

The first two are providers of supply chain management software and other "enterprise resource planning" applications. The latter two are e-commerce software vendors. Advest happens to be a market maker for all four issues.

Should Advest analyst Edwin L. McClendon's predictions come true, his employer will soon be handling more bids than asking prices on many ERP issues. "A lot of what we're saying just points out how beaten down these enterprise stocks have been," he says. "But as we get to the middle of this year, we're likely to see a sharp change in investor psychology."

Are ERP vendors ready to bounce off the bottom?

Here's the thesis. Because of concerns over software spending slowdowns in the face of Y2K, enterprise stocks have been brutalized so badly they might be mistaken for members of the post-Jordan Chicago Bulls. But that's going to change next year as companies return to new projects, and investors will likely realize that when they start looking at next year's earnings estimates. With so many ERP companies trading near their year lows, now is a good time to buy in.

For instance, Mapics tumbled as low as 3 15/16 from a 52-week high of 23, and hovers around 9 today. This year the company should post earnings of 58 cents a share, according to First Call. Next year the consensus target is 68 cents, or 17 percent profit growth. Revenues will grow even faster. McClendon's model factors that in and values Mapics at a market cap of $308 million, or $17 a share, nearly double the current price.

The same kind of thinking holds for the Advest's other recommendations. Companies such as TSAI, which specializes in electronic payments, are likely to be the main beneficary of corporations' revived interest in e-commerce, data management and development of new applications. McClendon sees the companies in his coverage universe posting long-term growth ranging from 16 to 29 percent.

According to McClendon, many ERP sales personnel report that sales have stopped falling, price competition is easing up, and requests for price quotes are going up. In other words, the worst is over.

"The downside is limited in this category," McClendon says. "If we're not at the bottom, we're pretty damned close. ... The activity level among salesmen is very high."

You can't say the same for ERP investors. With the exception of QRS, McClendon's companies currently trade at less than 23 times estimated 1999 earnings.

Historically, the market waits until mid-summer before looking at next year's prospects. But with enterprise stocks relatively cheap, you'd do well to anticipate next year now.

Other issues:

  • Nextel Communications
  • (Nasdaq: NXTL) Microsoft is investing $600 million, which certainly doesn't hurt, and wireless Internet access would seem to have a lot of potential. But remember that Microsoft's history of investment is nothing to be impressed with so far -- only RealNetworks has been a bonafide success, and it has come at the expense of Microsoft's own internal projects.

  • ACTV Inc.
  • (Nasdaq: IATV) I've said before that these guys have an intriguing future. But now that it's around $15 a share, it might be time for a breather, especially since the company won't see real revenue from its interactive TV and set-top box products until next year. How is that different from the aforementioned ERP players? Easy: the ERP guys are all established profit-makers currently at the bottom, whereas IATV is just a prospect, but trading at the top, so the risks are higher. Given that IATV seems to be a daytraders' plaything lately, the Beware Factor is magnified even more.

    The overall technology market was higher in mid-afternoon trading. As the week entered its final two hours of regular trading, the Nasdaq Composite Index was up 34.48 to 2453.63, the S&P 500 had gained 19.46 to 1300.87, and the Dow Jones Industrial Average had risen 90.62 to 10557.55. 22GO>