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Get Four
|  | DECEMBER 27, 2004
Tech Outlook 2005 –- Part 2 Here are S&P's 2005 forecasts for Net software and services, consulting and outsourcing, telecom, and wireless and communications gear The tech sector lost some shine in 2004, as worries about economic growth and weaker demand persuaded investors to look elsewhere for growth. So far this year through Dec. 10, the Standard & Poor's Information Technology index edged up just 0.4%, vs. a 6.8% gain in the broader S&P 500-stock index. The tepid gain is not too surprising after the 47.2% jump for Info Tech in 2003. However, telecommunications stocks have faired much better this year, climbing 15.2%, after rising just 3.2% in 2003, amid consolidation news and more focus on dividend-paying stocks. The strongest performers in 2004 were Internet software and services (up 61%), followed by wireless telecom services (up 53%). Semiconductor-related shares were the big losers. For clues on what to expect for info tech and telecom, BusinessWeek Online asked a team of analysts at Standard & Poor's for their 2005 outlooks for key industry segments, along with their favorite stocks. Overall, S&P has a marketweight recommendation on the info-tech sector, and an overweight recommendation on the telecom. This means investors should be particularly choosy. S&P has its top ranking on a few familiar names, including software makers Microsoft (MSFT ), McAfee (MFE ), and Veritas (VRTS ), and hardware giants IBM (IBM ) and Dell (DELL ). In the Internet advertising area, S&P's favorite pick is ValueClick (VCLK ). OVERVIEW. S&P also has strong buy recommendations on two analog chip outfits, Maxim Integrated Products (MXIM ) and Linear Technology (LLTC ); electronic manufacturing services provider Sanmina-SCI (SANM ); storage provider EMC (EMC ); and outsourcing companies Affiliated Computer Services (ACS ), Automatic Data Processing (ADP ), and Computer Sciences (CSC ). In telecom services, S&P's top picks include Verizon (VZ ), Alltel (AT ), CenturyTel (CTL ), and Canada-based BCE (BCE ). Among wireless telecom equipment, Qualcomm (QCOM ) and Motorola (MOT ) get the top ranking. The second part of this two-part series provides overviews from Scott Kessler, who covers Internet software and services; consulting and outsourcing analyst Stephanie Crane; wireline telecom services analyst Todd Rosenbluth; wireless equipment analyst Ken Leon; and communications equipment analyst Ari Bensinger. Part 1 of this tech survey provided outlooks from S&P chip analyst Amrit Tewary, semiconductor-equipment analyst Colin McArdle, computer hardware analyst Megan Graham-Hackett, information-technology services and data storage analyst Richard Stice, software analyst Jonathan Rudy, and specialty software analyst Zaineb Bokhari. Scott Kessler, Internet software and services and Internet retail One of the themes we're emphasizing for 2005 is online advertising. In our view, 2004 has been a banner year for Internet marketing. We forecast an increase of 28% in U.S. online-advertising spending in 2005 (to around $13 billion), which we consider very healthy growth. We believe online-ad spending will continue to benefit from more Internet users and Internet-enabled devices, faster Internet connections, and greater Internet usage in the U.S. and around the world. We also think corporations will spend an increasing percentage of their marketing budgets online to capitalize on these favorable trends and more effectively target and interact with online users. Reflecting our optimism about Internet advertising, we recommend the shares of ValueClick (VCLK; strong buy; $13) and Yahoo! (YHOO; buy; $37). Yahoo owns and operates one of the world's most popular online content, communications, and commerce networks. We see Yahoo as the place to go for advertisers wishing to reach a large online audience and believe that Yahoo's compelling inventory continues to be in high demand around the world. WEB WRAPUP. ValueClick enables marketers to advertise and sell their offerings via a variety of online channels including display advertising, keyword search, e-mail, and affiliate programs. It also provides software that aids advertising agencies with information management for financial, workflow, and offline media buying and planning purposes. We expect ValueClick to gain market share and expand internationally in 2005. We also expect 2005 to be a year of consolidation for Internet companies. In our opinion, many online players have nicely profitable businesses, very healthy balance sheets, and considerably appreciated stocks. Two stocks we recommend that we think could be acquired at premiums are ValueClick and priceline.com (PCLN; buy; $24). We think ValueClick could be attractive for an online or offline advertising-focused company, and priceline might make sense for a larger Internet travel player like Sabre Holdings (TSG; sell; $23) seeking brand and channel diversification. Stephanie S. Crane, IT consulting and outsourcing We expect the IT consulting and outsourcing services sector to benefit from an increase in corporate spending in 2005. We project double-digit growth for services aimed at business process outsourcing (BPO) as well as high-end IT applications and value-added consulting services, driven particularly by solid demand from corporations in the U.S. and Europe. In fact, we believe European corporations are beginning to appreciate the operational efficiencies garnered from outsourcing. In the face of growing demand, we expect additional competition in BPO, as more companies, such as IBM (IBM; strong buy; $96) and Hewlett-Packard (HPQ; hold; $21), add offerings, which we believe could force a mix shift where contracts and pricing focus on value-added instead of boiler-plate products. We see Affiliated Computer Services (ACS; $60), Automatic Data Processing (ADP; $46), and Computer Sciences (CSC; $57) benefiting from these trends, and have strong buy recommendations on each. We have a 12-month target price of $67 on shares of Affiliated Computer Services. Our target price is based on our discounted cash flow (DCF) calculation as well as the discount that the shares trade at to the S&P MidCap 400 on a p-e-to-growth basis. In fiscal year 2005 (ending June), we expect revenue growth of 17% for ACS, with EPS up 19% to $3.16.
BW MALL
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