PurchasePro gained 15 percent Tuesday as analysts sang the praises of the business-to-business company's fourth quarter and said its critics can eat humble pie.
PurchasePro shares lost more than 42 percent of their value last week after Barron's questioned the company's business model and valuation and Prudential Securities downgraded the stock from "strong buy" to "accumulate."
Shares in the online procurement network were up Tuesday following its fourth-quarter report and conference call in which the company's partners blasted Barron's accusations, and received a show of support from analysts.
PurchasePro easily hurdled analysts' estimates in its fourth quarter Monday, raking in $7.6 million, or 11 cents a share, on sales of $33.6 million. It also raised its estimates for first-quarter and fiscal 2001 sales and earnings.
No matter what metric analysts honed in on in their research notes Tuesday, they saw reason to get ecstatic.
With 94 percent sequential revenue growth, and gross margins of 94 percent, PurchasePro is well ahead of competitors like Ariba (Nasdaq: ARBA) and Commerce One (Nasdaq: CMRC), said Lehman Brothers analyst Patrick Walravens. Those figures simply prove the company's business model is superior, said the analyst, who reiterated his "strong buy" rating.
Aside from beating estimates, the company is also beginning to see increasing adoption of its services, and an upturn in the volume of transactions, SG Cowen Securities analyst Pawan Malhotra said. The company also kept expenses in check while scaling revenue, noted Malhotra, who reiterated a "strong buy" on the stock and a price target of $55.
"Not much here for shorts to like," said Credit Suisse First Boston analyst Ian Toll, who also reiterated a "strong buy." (Shorts are investors who profit from betting against a stock.)
Toll noted that short interest in the stock stands at 14.4 million shares--or 23 percent of shares outstanding--after last week's Barron's imbroglio. The short sellers are likely to take their lumps this week as the stock goes back up, he said. His price target is $60.
The remarkable appearance of the company's partners on its fourth-quarter conference call went a long way towards dispelling concerns about customer satisfaction and the validity of PurchasePro's business model. The company's direct approach to dealing with questions about its CFO search and a recent lawsuit also reassured analysts.
To demonstrate their satisfaction with PurchasePro's services, representatives from Computer Associates (NYSE: CA), Hilton Hotels (NYSE: HLT) and Honeywell (NYSE: HON) participated in the earnings conference call.
The company also shot down concerns about its CFO search. This is the third consecutive quarter that James Clough--someone whom the company has acknowledged has little experience--has acted as interim CFO.
Clough stated on the call that the process for finding a "world-class" CFO has narrowed down to a handful of candidates and that he expects one to be hired this quarter.
Officials also blasted worries about a pending lawsuit in which a former colleague accused CEO Charles Johnson Jr. of stealing his business concept. PuchasePro's corporate counsel dismissed the lawsuit's relevance, saying that the concept in question was related to offering supplier catalogs on CD-ROM, which has not been part of PurchasePro's business for several years.
Analysts added on a cautious note that they await the company's 10K filing to better understand certain non-cash charges and the extent of AOL's contribution to this quarter's revenue.
The company's non-cash charges added up to $47 million for the quarter. Walravens noted that one of the charges was a sales and marketing expense associated with the repurchase of certain rights from E-MarketPro, LLC, an e-commerce service company whose principal is Bradley D. Redmon, a cousin of PurchasePro's CEO.
"While we don't like the idea of a $2.8 million payment to a company controlled by the CEO's cousin, we do like the fact that this relationship has been cleaned up," Walravens said.
The Kentucky stigma
Accusations of cronyism was one of the undercurrents of Barron's critique of the company last week, which opened with a scene set at the Kentucky racetrack. The company's lack of pedigree may be one of the biggest issues hampering the company, according to one analyst.
Toll addressed what he said is "the issue you won't see addressed in most research reports," the company's pedigree.
"We believe that a lot of the objections to PPRO come down to innuendo and concern about the style of the management team," Toll wrote. The company has never had a Silicon Valley pedigree, being based in Las Vegas, and financed by its founder and angel investors from the gaming industry.
People who meet Kentucky native Charles "Junior" Johnson, react in one of two ways, Toll observed. "The doubters can't get comfortable with someone they regard as a fast-talking, profligate and eccentric individual who promotes rather than explains his company. The believers see a hard-driving, street-smart (albeit colorful) visionary who has built his business with a single-minded focus on profitability.
"The doubters haven't dug deep enough," Toll concluded.