|
Inside the
World of Integration Software Stocks
There's money to be made over the next decade in glue stocks and
I'm not talking about Elmer's.
Say what? Let
me explain.
Throw away your
concerns about decreased IT spending killing enterprise software
stocks for a second and peer into the big picture with me.
Forget market
timing and think long term.
A relatively
young sector of the software universe known as Enterprise Application
Integration [EAI] is definitely an area that tech investors
should now be monitoring for investment opportunities.
EAI companies
essentially provide "the glue" -packaged software- that
helps provide the foundation for integrating a company's disparate
applications and databases running on different computer systems.
In other words,
EAI companies help best of breed applications; say a Siebel
CRM system and an Oracle or IBM database all integrate
nicely together, giving companies a much richer, real-time view
of their business processes.
Of course, in
a world where companies and customers are increasingly using more
applications and more devices to communicate, the amount of new
work for EAI firms continues to rise as well.
In fact, analysts
expect the EAI market to grow from $600 million back in 1999 to
over $5 billion by 2003.
With this in
mind, we decided to take a look this week at EAI players Tibco
Software, CrossWorlds Software and Vitria Technology.
Let's see what
we found out.
TIBCO Software [TIBX]
Every sector
has its gorilla, and Tibco Software is as close as it comes to one
for the integration software business. Tibco's flagship product,
The Information Bus or TIB, now helps enable the real-time distribution
of information for well over 1,000 heavyweight clients. While Tibco's
technology was first used to digitize Wall St., the integration
king now works with everyone from Yahoo and Cisco
(both minority shareholders) to GE Capital, Enron
and Sun Microsystems.
While Tibco's
stock has been quickly turned on its head and beaten over the past
year, Tibco- the company- continues to do a relatively good job
of weathering the IT spending depression. These guys are survivors.
Second quarter sales surged 55% to $83.7 million as Tibco posted
pro forma net income of $7.6 million. While sales grew an eye-popping
160% last year, this growth is expected to slow down to around 50%
for 2001. On the earnings front, EPS is expected to decline 22%
to $.18 per share this year from $.22 per share in 2000.
Bottom line,
Tibco remains a great company, but even after seeing its stock drop
over 90% from its old high to around $8 bucks now, this is not an
ultra-cheap play at this point. TIBX currently trades for roughly
fives times this year's expected sales and still sports a pricey
forward PE of 44. Further, we are also somewhat disappointed to
see TIBX majority owner Reuters still unloading Tibco shares in
the $9-$10 range. The company's cash stockpile of over $600 million
or $3 bucks per share is a big plus, but not enough for us to buy
TIBX right now.
RagasRating:
NEUTRAL
Vitria Technology [VTRA]
Where's the
beef- err, we mean growth! That's the question that Vitria investors
and management are asking themselves these days. While the company
continues to be well-regarded by systems integrators and has a very
high end customer list (AT&T, BP, American
Airlines, Deutsche Bank etc), Vitria now finds itself
scrapping to show top line growth. On the plus side, Vitria has
done a very good job over the past few quarters over better diversifying
its customer list. Telecom companies have traditionally been the
majority of Vitria's business.
While Vitria
has been profitable previously, the company posted a pro forma loss
of $12.3 million last quarter. Sales rose 8% to $34.4 million during
the period, but actually fell slightly  on
a sequential basis. Vitria hopes to return to profitability during
the first half of 2002. We shall see. For the upcoming quarter,
the firm expects sales to remain essentially flat in the $34-$35
million range. Back in April, Vitria scooped up privately held XMLSolutions,
in a move to become more aggressive in the new XML market and hopefully
help jumpstart sales.
At a recent
price of $2.30 per share ($300 million market cap), we like Vitria's
sizeable $193 million cash cushion, which works out to almost $1.50
per share in cash. What makes us pause, however, is slowing top
line growth from a firm that is trying to figure out how to get
back in the black during a drastic slowdown in IT spending. While
I suspect Vitria will get there sometime next year, it doesn't make
sense trying to fight the overall negativity surrounding the stock
right now. 5 of 10 analysts have a HOLD rating right now. We'll
pass.
RagasRating:
NEUTRAL
CrossWorlds Software [CWLD]
While much smaller
then rivals like Tibco and Vitria, CrossWorlds has managed to carve
itself out a nice solid (and growing) position in the business integration
software business. Of course, one wouldn't know that by taking a
quick look at the company's stock price. CrossWorlds shares are
down 90% over the past 52-weeks to a lowly $2.77 per share. Beyond
the crippled stock price, though, CrossWorlds has locked down a
blue chip customer list, which includes the likes of Sony,
DuPont, Whirlpool and The Dow Chemical Company.
More importantly,
CrossWorlds is now well on its way to entering the rarified land
of profitability. Applause, please. For Q2, sales jumped 77% to
$20.1 million. Pro forma net loss for the period (excluding restructuring
charges) was $1.2 million. CrossWorlds expects to be profitable
by Q4 of this year. Further, the company actually raised its 2001
sales estimate from $75-$80 million up to over $85 million as part
of its second quarter earnings announcement. Looking further out,
CWLD's pro forma EPS should exceed $0.15 per share next year.
Clearly, there
is much to like about CWLD's valuation right now. For one, this
is a company on the brink of profitability with $24.7 million still
in the bank (representing 33% of its $74 million market cap). In
addition, CrossWorlds is currently trading for less than one times
its 2001 sales estimate. Finally, while this is a company that analysts
expect will grow its EPS at a 40% clip over the next year, CWLD
only sports an estimated 2002 P/E right now of 18 or so. Time to
bag this puppy and sit patiently.
RagasRating:
POSITIVE
|
