Give Adams, Harkness & Hill's enterprise software analysts credit for brazenness.
Among 15 brokerage firms polled by Zack's Investment Research, all but one recommend front office software vendor Siebel Systems Inc. (Nasdaq: SEBL) as a some sort of buy, with nine of them maintaining the equivalent of "strong buy" ratings on the stock. The appeal is obvious: the share price has multiplied more than eight times on a split-adjusted basis, since the company went public three years ago; earnings and revenue growth has been historically strong, including year-over-year increases of 80 percent for the top line and 119 percent for the bottom in the first quarter.
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It takes nerves to go against that kind of current, but Adams Harkness & Hill's Benjamin Rose and Kevin Wagner have been doing that all year with Siebel. The analysts downgraded the company to "market perform" in January, and this week actually slapped a rare "sell" rating on the stock. The move has dampened enthusiasm for Siebel shares, which gained just 1/8 yesterday on a day when the overall technology market did very well, and so far today have retreated more than 7 percent.
Rose and Wagner believe Siebel's sales, marketing and customer service applications face difficult competition from much cheaper alternatives that offer almost as much functionality. And Siebel's earnings aren't as rosy as they seem on paper, the analysts say, noting that despite $40 million in recorded net income over the last two quarters, no cash has been generated. That could indicate the company is dealing more heavily in "barter transactions" in which service partners also act as customers, with the two sides exchanging products and services rather than money. And Siebel's reliance on its top 10 customers has grown.
Other points asserted by the analysts:
-- Siebel's margins are falling because the company is getting more revenue from services.
-- Growth of the Internet will force Siebel to spend a lot of money buying e-commerce technology.
-- Management is thin, as indicated by the recent hiring of at least four new executives.
The analysis not only goes against Wall Street's views on Siebel, but also goes against technology analysts' general tendency to give their companies the benefit of the doubt, in the absence of any negative history. You could describe Adams, Harkness & Hill's call as a pre-emptive strike against future letdowns.
It also goes against every public assertion of the company. Siebel executives -- such as chief operating officer Patricia House in a recent interview with ZDII -- routinely dismiss competitors as being almost non-existent. The company says earnings and margins growth will continue to be satisfactory. It doesn't expect any major acquisitions, and says its product line is well-suited for the Internet. And you can safely assume that management doesn't consider itself thin.
At the very least, Rose and Wagner lack faith in Siebel's ability to justify its current market value, which remains relatively high, even with today's pullback. But as much as you might doubt Siebel's self-promotion, Rose and Wagner's assertions ask investors to make a similar leap, just in the other direction. Considering Siebel's success in developing its own technology so far, no one can say for sure that the company will suddenly have to make a major acquisition to get into e-commerce technology. And with its traditional aggressiveness, Siebel has the sales force to protect its leading-by-a-wide-margin market share. Certainly other companies have done it, including companies with more unpredictable histories, such as Oracle.
Even at its current valuation -- name one market leader that isn't high priced -- Siebel has a track record that commands respect. But on the heels of a provocative research report, the stock isn't getting it right now.
But when you miss Wall Street's target three out of the last five quarters, including the last two, it's your fault. With a First Call consensus per-share profit estimate of 4 cents -- flat year-over-year growth -- analysts weren't asking for lofty things from this ERP vendor. Vantive got a new CEO after last quarter's disappointment, and while you can't expect miracles in three months, investors and analysts have a right to expect proper guidance from Vantive. Instead of getting it, they received this: "The quarter's financial results do not completely reflect the growth of our business."
Maybe investors would be more forgiving (doubtful) if Vantive didn't have a history of disappointment. Unfortunately, it does.
The overall market was down in mid-afternoon. With two hours left in regular trading, the Nasdaq Composite Index had fallen 2.74 to 2734.04, the S&P 500 had eked out a gain of 1.24 to 1389.36, and the Dow Jones Industrial Average had slid 19.94 to 11115.18. 22GO>