Earnings expectations boost BMC
Shares of the mainframe software maker swing upward on word that third-quarter results will beat expectations, but the company and its competitors may not be out of the woods yet.
Shares closed regular trading up 43 percent, or $6.75, to $22.38.
BMC announced Wednesday night that it expects to report earnings of between 20 cents and 22 cents a share for its third quarter, above the Street's consensus of 16 cents a share on slightly better revenue growth.
UBS Warburg analyst Kevin Buttigieg said that though BMC is due for a bounce from its current five-year low, it's not out of the woods yet. He maintained a "hold" rating and an $18 price target.
He attributed the company's revenue upside to its mainframe business and IBM's ability to exceed its planned amount of mainframes in December.
"Longer-term, we're not confident in the secular demand trend for mainframes," Buttigieg said. He added that on the positive side, IBM should face fewer supply constraints in the March quarter, and he called BMC's estimates for the quarter "realistic."
"For us to gain more confidence in the stock, we'd need to see that this quarter was more than a one-quarter mainframe rebound," Buttigieg added.
According to the latest SG Cowen Securities computer industry survey, there is still no improvement in mainframe capacity demand, suggesting that it may take a few quarters for the rebound to come.
SG Cowen analyst Drew Brosseau iterated a "buy" rating, but agreed that tough times are still ahead; he said the company faces another challenge in March before IBM's new zSeries mainframe cycle.
Brosseau also noted that IBM's delay in completing its new usage-management software could cause shortfalls in future quarters.
A boost for competitors?
Analysts were mixed on what the news meant for Computer Associates and Compuware.
"We'd be cautious in assuming that...mainframe strength can be extrapolated to Computer Associates and Compuware," said Buttigieg. He explained that most of BMC's revenue upside came from IBM's improvement in MIPS shipments, something that can't be correlated to both these stocks.
ABN AMRO analyst Robert Johnson issued a bullish note on CA after BMC's announcement. Good news at BMC bodes well for its rival, the analyst said, since the companies "compete in many of the same markets."
He maintained his "buy" rating on CA and said that the BMC news would undoubtedly have a positive effect on the stock.
Analysts also said that the economy, and not the BMC's fundamentals, would limit the stock's performance.
"The slowing in the economy has raised questions about the strength in IT spending budgets in 2001. While budgets should still show solid growth, the pace will likely be slower than last year," Brousseau predicted.
Brosseau also cited "generally sluggish mainframe capacity demand" as a challenge that will likely limit the rebound.
Wasserstein Perella analyst Stephen C. Dube also repeated his "hold" rating on BMC despite the positive news, citing "a slowing economic environment."
He expects shares to trade within a range of $15 to $25 per share.