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Sapient slides on earnings warning

The technology consulting firm is off 26 percent after its fourth-quarter warning, but is still faring well compared to competitors.

    Technology consulting firm Sapient was off 26 percent Friday after its fourth-quarter warning, but was still faring well compared with competitors.

    Shares were down $3.94, to $11.13, in early trading Friday morning. Analysts remained upbeat on the stock.

    On Thursday, the company said revenue of $139 million is expected to be flat with the third quarter. Earnings are expected to be around 10 cents a share, 2 cents lower than the Street's consensus. Management attributed the shortfall to a continued falloff with dot-com customers and to a lesser extent, slower spending among established enterprise clients.

    Deutsche Banc Alex Brown analyst Mark D'Annolfo said despite this shortfall, Sapient is still "better positioned than others." He continued to rate it a "buy." The analyst added that Sapient remains the franchise player in the sector and is attractive at anything below $13 per share.

    Competitors such as iXL Enterprises and Razorfish, which was recently downgraded, are hovering around the $1 mark.

    "We still consider Sapient the premier vendor in this battered sector. It is among the most profitable vendors in the group, with significant cash generation," said SG Cowen Securities analyst Moshe Katri. He maintained a "strong buy" rating and kept his price target of $28 a share. Katri said that "given current valuations and the temporary nature of the current IT spending freeze, we don't see a reason to downgrade our rating on Sapient."

    Despite the shortfall, D'Annolfo saw several positives for the company: Sapient's shortfall was not as severe as those of competitors; its core business with enterprise customers posted healthy growth; turnover does not appear to be a problem; and there are no collection difficulties.

    Katri found that most metrics indicated the company is tracking in positive territory and remains cash-flow positive.

    Though WR Hambrecht analyst Gregory Gore reduced his rating to "buy" from "strong buy," he also called this a "small miss" and noted that the company's core business grew, and operating margins remained strong.

    MarchFirst executives expect the following quarter, the first quarter of 2001, to be flat, before the company experiences a gradual sequential acceleration in revenue growth.

    "We tend to agree with Sapient's management that (information technology) spending should resume by" (the second half of 2001), said Katri, who noted that not only has a potential fourth-quarter earnings miss been factored into the market for Sapient and its competitors--it has also factored in a flat first quarter.

    Goldman Sachs analyst Gregory Gould also maintained a "long-term attractive" rating on the stock and said the preannouncement wasn't "much of a surprise."

    "The shares appear to have hit their low, trading at about $10 in the aftermarket," Gould stated in his research note.