Markets & Finance

S&P Cuts Software Sector


S&P cut the software sector to neutral from overweight, and is keeping its 5 STARS (buy) ratings on Electronic Arts (ERTS) and Symantec (SYMC).

The specific S&P categories involved in this downgrade are application software and systems software. S&P still believes software will benefit from long-term IT spending trends utilizing existing hardware infrastructure. However, the lack of near-term IT spending pick-up and the approach of summer months -- a challenging time for technology -- warrants a more cautious stance on the sector. S&P blieve it's important to stick with high-quality names that have consumer exposure, such as Electronic Arts and Symantec.

J.D. Edwards (JDEC): Downgrades to 2 STARS (avoid) from 3 STARS (hold)

Analyst: Jonathan Rudy

Cost controls recently better were than expected. However, with the continued IT spending slowdown, S&P believes the company will have a difficult time growing revenues, particularly with recent news from other software companies that the market for small to medium-sized businesses remains challenging. S&P sees a fractional revenue increase in fiscal 2002 (Oct.), but is lowering the operating EPS estimate to $0.24, from $0.27. At 57 times this estimate, and despite a faster return to profitability than S&P expected, avoid J.D. Edwards.

Hospitality Properties Trust (HPT): Upgrades to 5 STARS (buy) from 4 STARS (accumulate)

Analyst: R. Mathis

The company completed its purchase of 21 hotel properties for $145 million and lease-back at $16 million per year plus 10% of gross revenue gain after 2002. S&P feels Hospitality Properties will likely acquire additional properties in 2002 from weakened competitors, which should continue to drive cash flows and dividends higher. The company has already increased its dividend 13-fold since its 1995 IPO. At only 17 times S&P's increased 2002 EPS estimate of $2.16, with 7.9% yield and strong growth potential, S&P views the shares undervalued. S&P's six to 12 month target price: $44.

S&P cut its outlook on the technology sector to marketweight, but is keeping its 5 STARS (buy) rating on select stocks: Microchip Technology (MCHP) Intuit (INTU) and Electronic Arts (ERTS)

Analyst: Thomas Smith

S&P is taking a more cautious stance on technology stocks, and is lowering the sector to marketweight. S&P thinks some valuations look too ambitious for such an early stage of sector recovery, and the near-term technical outlook still is bearish. Profit warnings from select software makers, including IBM and Nortel, suggest widening variation in the time it will take for these industries to recover. S&P sees semiconductor stocks and semiconductor equipment stocks as early movers. The outlook is hazier for software, computers and networking hardware, but expects improvement as the economy accelerates in late 2002. Telcom gear will be a likely laggard. S&P's favorites serve diverse, consumer-oriented markets, such as Microchip Technology, Intuit and Electronic Arts.

IBM Corp. (IBM): Reiterates 4 STARS (accumulate)

Analyst: Megan Graham Hackett

IBM's share price is set to rebound Friday following SEC's disclosure regarding Thursday's rumors of an SEC inquiry. After the market's close on Thursday, the SEC announced that it "promptly" closed a preliminary inquiry into IBM without any action. S&P continues to believe that with shares trading at 17 times S&P's 2003 estimate of $5.16 -- well below peers and the broader market -- IBM remains undervalued.

RSA Security (RSAS): Maintains 2 STARS (avoid)

Analyst: Jonathan Rudy

RSA posted a first quarter operating loss of $0.11 vs. EPS of $0.17 -- a penny worse than S&P's lowered estimates. A revenue decline of 27% was in line with the company's pre-announcement. RSA also took a restructuring charge of $10 million. S&P anticipates a low double-digit revenue decline in 2002, and is lowering the per-share estimate to an operating loss of $0.07, from EPS of $0.10. With RSA still in the middle of a SEC inquiry and with disappointing results, S&P would avoid shares despite strong long-term prospects for the Internet security sector.


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