The segments that are likely to recover the soonest, he says, are customer relationship management (CRM) software, Internet security, and Web services. He thinks segments such as enterprise software and supply-chain management (SCM) are likely to lag behind in a recovery.
Rudy made these comments in a chat presented July 2 by BusinessWeek Online and Standard & Poor's on America Online, in replying to questions from the audience and from Jack Dierdorff of BW Online. Edited excerpts follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Jon, the market flirted with low levels today. How nervous are you at S&P?
A: I can't speak for the rest of the group, but particularly in technology and software, it has been tough this year. The way I've been trying to get through this downturn is by sticking with market leaders that have strong balance sheets and cash flow.
Q: How do the software stocks compare with other tech stock sectors in performance?
A: Well, systems software has held up somewhat better due to the performance of Microsoft (MSFT
). However, applications software has been hit like the rest of technology.
Q: What are your thoughts on Microsoft and Siebel Systems (SEBL
)? Siebel was in the news today because of a downgrade by Wachovia.
A: Siebel is a 5-STAR [a buy in S&P's Stock Appreciation Ranking System -- STARS]. It's the market leader in CRM software. It dominates its market, and the primary reasons I have a buy on the stock are the company's strong balance sheet and impressive free cash flow. It'll survive this downturn and should emerge as strong as ever. I have a 4-STAR or accumulate on Microsoft -- again, primarily due to the revenue diversification the company has, as well as the strongest balance sheet going, with nearly $40 billion in cash and short-term investments and no debt.
Q: What is the future of Oracle (ORCL
A: Oracle has struggled lately. However, we have a 4-STAR recommendation on the shares due to its leadership in the database market, strong cash flow, and balance sheet as well. It should benefit internationally, as well as Microsoft and Siebel. Oracle should receive a boost from the weakening dollar, which should help results over the next few months.
Q: You said at the outset you especially like companies with strong cash flow and balance sheets. Besides Microsoft and Siebel, can you name some others in that group?
A: Sure. Oracle, Check Point Software (CHKP
), Symantec (SYMC
), and Electronic Arts (ERTS
Q: Does Novell (NOVL
) have a future?
A: I have a hold or 3-STAR recommendation on Novell, and the primary reason that it does have a future is the fact that it has nearly $700 million in cash and no debt. However, I remain concerned over its strategy with last year's acquisition of Cambridge Technology Partners. I did, however, find the recent acquisition of SilverStream Software (SSSW
) to be an interesting technology acquisition.
Q: It's hard to talk about anything connected with computers without this name -- what about IBM (IBM
A: I don't cover IBM. However, Megan Graham-Hackett covers the stock and has a 4-STAR recommendation on the shares. On the software side, it has been a serious competitor to BEA Systems (BEAS) with the Websphere applications server. However, in other areas of software, IBM has struggled competitively.
Q: Will software lead, lag, or stumble along as we return to a growth economy?
A: That's a difficult question, because I believe some areas of software will lead in the areas that remain priorities in information-technology budgets, such as Web services, Internet security, and CRM software. However, other areas, such as enterprise resource planning (ERP) and supply-chain management have seen significant overspending in recent years and will likely lag the broader recovery.
Q: Do you see any sign of business customers for software and commercial
services starting to spend again?
A: Here and there. Again, certain areas, such as Internet security, have held up better. But it's very difficult to see any across-the-board pickup in IT spending at this point.
Q: Is there any new software technology that could ignite the market?
A: That's the million-dollar question right now. Web services looks like it could be big. However, there's no apparent killer application right now.
Q: Jon, could you explain your criteria for selecting a company to cover?
A: Sure. First, we start with the index universe. What that means is S&P 500, S&P MidCap, or SmallCap members. Second, we usually have a minimum market-cap size -- we typically look for companies with over $500 million in market cap and would prefer companies that trade over $10 per share. So in this environment, it has been quite a challenge in finding new companies, particularly in technology.
Q: Have you added any companies recently to coverage -- or dropped any?
A: I initiated coverage of THQ (THQI
) about three months ago, and it's currently a 4-STAR recommendation. And BEA Systems -- I initiated last year. Those are the last two companies I've initiated. I haven't actually dropped any. I'm holding on by the skin of my teeth with some companies right now.