Taking Stock: Companies Worth Watching In An UpturnTaking Stock: Companies Worth Watching In An Upturn

Not everything has been upbeat in technology lately.

Not surprisingly, many technology companies are beating Wall Street consensus estimates for revenue and earnings per share. Because tech-stock traders often hang on to a particular stock for only minutes or seconds, it isn't surprising that tech-stock price momentum has been extremely robust of late. The best news has been in the Internet arena; eBay and Yahoo have seen strong gains.

But I look at the earnings news of all the middle-range enterprise-oriented technology companies. These are the companies that tend to supply the nuts and bolts of software and hardware. They are a lot less flashy, and their business is much more closely aligned with the overall business cycle and IT spending.

For example, I was keenly interested in JDA Software this week. The company supplies a lot of the software used in retailing. Retail has been a hot sector of late as Americans keep on pushing up the credit-card bills. I was wondering whether this translated to better business for JDA Software.

The company reported fourth-quarter 2003 revenue and earnings per share of $55.2 million and 5 cents, respectively. License revenue was $16.9 million, down 11.5% sequentially and down 6% year over year. This was substantially below Wall Street expectations of more than $20 million for license sales. Undoubtedly, some deals got delayed, as two-thirds of all software licenses are closed in the last few weeks of the quarter.

License revenue declined in all parts of the globe, including Europe and Asia. There wasn't even one deal that was over $1 million. Average selling price was down to $363,000, versus $637,000 in the third quarter. Earnings hit the Wall Street consensus estimates because of higher-than-expected service margins combined with the lower-than-expected incentive compensation expenses. It isn't going to help JDA Software's cause that its next product suite is behind schedule and is unlikely to launch before the third quarter of this year. However, the fact remains that it is one of the market leaders in retail software applications, with an installed base of more than 4,700 customers.

Despite the disappointment, the company's share price trades at slightly more than two times book value. Based on consensus Wall Street earnings per share of 49 cents and 73 cents in 2004 and 2005, respectively, the company trades at a price-to-earnings ratio of 34.1 times 2004 earnings per share and 22.9 times 2005 EPS based on the current share price of $16.70.

If the economy continues to expand and corporate IT spending accelerates, it increasingly will be companies like JDA Software that are likely to benefit. Even though the current numbers may seem disappointing, these are the companies that could reap the benefits from an extended economic expansion. After all, the poor results may set the stage for some surprises on the upside.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the information 100 Stock Index. Reach him at [email protected]. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

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