Markets & Finance

Sybase: A Solid, Undervalued Tech


By Jonathan Rudy, CFA With the increasing volatility in technology over the past two years, we at Standard & Poor's have started looking for attractive opportunities in order to get exposure to a potential turn in information-technology (IT) spending. But at the same time, we want to minimize downside risk if IT outlays don't improve as many investors hope. Thus, we recently upgraded database software provider Sybase (SY) to 5 STARS (or buy), based primarily on its attractive valuation, strong balance sheet, and solid management team.

While it's not the most exciting or glamorous tech company out there, Sybase is a solid, strong, cash-generating outfit that trades at a significant discount to its peers, as well as its intrinsic value based on a

discounted cash-flow analysis.

Sybase is mainly known for its database software, where it trails behemoths like IBM (IBM), Microsoft (MSFT), and Oracle (ORCL) in market share. However, while database software isn't a dominant business for Sybase, it's a profitable one that generates strong cash flow, enabling the Dublin (Calif.) company to invest in other market opportunities. Sybase operates five divisions: Enterprise Solutions, iAnywhere Solutions, Internet Applications, Business Intelligence, and Financial Fusion.

RISK MANAGEMENT. The Enterprise Solutions division includes Sybase's flagship database-server, Adaptive Server Enterprise, in addition to products that help enterprises integrate, move, and manage large amounts of data and applications across diverse computing environments. iAnywhere solutions extend enterprise systems to remote and wireless devices that enable e-business and mobile business anywhere, anytime.

The e-Business division offers products and services that allow businesses to design, build, and deploy distributed and Web-based applications. The Business Intelligence division helps businesses consolidate and analyze large amounts of information from data warehouses to help managers make better decisions. And Financial Fusion provides e-finance products that enable financial institutions to integrate financial services, channels, platforms, technologies, and applications for delivery to capital markets and retail clients.

We at S&P anticipate approximately 5% revenue growth in 2003, with about 9% earnings per share (EPS) growth. While that's not an explosive near-term growth rate, Sybase has done a better job than most of its peers at managing its downside risk during the sharp tech declines in 2001 and 2002.

NEON GLOW. Growth should be driven by the company's e-commerce infrastructure software, enterprise portals, and wireless/mobile products. Sybase's past restructuring has led to a significantly lower cost structure, resulting in improved profitability.

In addition, its results should begin to benefit from the mid-2001 acquisition of New Era of Networks (NEON), which will help expand growth outside of its database business. NEON makes software that allows companies to link applications that manage client information, supply chains, and other areas of business operations from a variety of vendors. NEON has recently been merged into the e-Business Division.

SLOW BUT STEADY. Trading at 1.5 times sales and 12 times our 2003 EPS estimate of $1.13, compared to peers that trade at 6 to 9 times sales and near 30 times forward earnings, we believe that the market is pricing in very little growth for Sybase. Though a discount to peers like Oracle and Microsoft is warranted for Sybase shares, we think investors are ignoring promising international opportunities such as China that could be a lot stronger when the global economy begins to improve.

Sybase could sustain 10% to 12% earnings growth over the next couple of years. Its balance sheet remains very strong with nearly $4 in cash per share and no debt.

While it may not be the most explosive tech growth story, Sybase is a steady, solid company trading at very reasonable valuation levels. Based on our discounted cash-flow model, we believe that its shares -- now trading at $13.25 as of market close on Dec. 12 -- are attractive at a notable discount to their intrinsic value range of $16 to $19. Analyst Rudy follows software stocks for Standard & Poor's


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