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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | MAY 10, 2001 STREET WISE By Amey Stone PeopleSoft: No Need for the Hard Sell Big companies hope the software maker's wares will trim their costs. In a downturn, that's the engine driving this resurgent stock
Well, turnabout is fair play. At a time when the B2B concept has been all but abandoned (see BW Online, 4/12/01, "B2B by Another Name, Any Other Name"), PeopleSoft is still on track to meet its 2001 growth plan -- the same one it had at the start of the year. It seems the economic slowdown, while causing corporations to clamp down on technology spending, has also perked up corporate interest in PeopleSoft's core human-capital management software. For the first quarter, the company reported record sales of $503 million -- up 34% on the same quarter a year earlier and 1% above the fourth quarter of 2000. Profits were $36 million -- 11 cents a share, or 2 cents better than Wall Street was expecting -- and up from only $17 million a year earlier. For the year, the company expects to earn between 55 cents and 60 cents a share, vs. 31 cents in 2000. SUBSTANCE BEATS SEXY. "PeopleSoft is part of the solution and not part of the problem," CEO Craig Conway crowed in a conference call with analysts on Apr. 25 that followed the stellar first-quarter results. "Our Internet applications lead to higher productivity, greater efficiency, and lower costs. Right now that resonates well with large enterprises." That focus on business processes didn't sound too sexy in the Internet's heyday, acknowledges PeopleSoft CFO Kevin Parker, who adds: "But when you look at the world today, and the dot-com bubble has burst, a lot of those exciting business models have turned out to be hot air." Following the earnings surprise, PeopleSoft was upgraded by the likes of Goldman Sachs, Morgan Stanley Dean Witter, and Credit Suisse First Boston, rising $6.50 to $37 a share the next day. Since then, it has edged higher and closed on May 9 at $39. It is still well below its January high of $54, but, compared to the far steeper declines at competitors like Oracle (ORCL ) and Seibel Systems (SEBL ), it has held up well. Driving the stock run-up is faith in PeopleSoft's product line and its broad set of customers. Its suite of business applications, PeopleSoft8, debuted last September and is being adopted by customers who hope it will cut their costs. It has a new customer-relationship management application due out in June that analysts expect to show a high return on investment and drive future sales. BARGAIN BUYS. With $1.2 billion in cash and investments as of Mar. 31, PeopleSoft is in a strong financial position to add to its product lines. On May 1, it announced it is acquiring privately held SkillsVillage's, which makes software that allows companies to automate the purchase of services. "The silver lining of this economic market is the opportunity to acquire companies that are leaders in their fields but whose own resources don't allow them to scale and fully take advantage of market opportunities," Conway said on a conference call. Meantime, while some smaller software companies have weakened financially, PeopleSoft's competitive position has improved. "Large corporations have been waiting for a viable vendor like PeopleSoft to enter this space," says Chris Wong, SkillsVillage CEO. "We think it will have a huge impact on our pipeline." That doesn't mean all is rosy for PeopleSoft. Conway acknowledged companies are taking longer to approve purchases, and pricing pressure is increasing. "Let me be clear that this environment is not good, and it has no signs of improving," he said. Besides, PeopleSoft faces lots of competition, including Seibel in the CRM business, and Manugistics Group (MANU ) and i2 Technologies (ITWO ) in supply-chain management. "It will have a very difficult time competing with them," says Jon Ekoniak of U.S. Bancorp Piper Jaffray, who has a neutral rating on PeopleSoft. HAPPY CUSTOMERS. Probably the most controversial feature of the stock is its valuation. It trades at a 2001 price-to-earnings ratio of 53 and a 2002 p-e of 53 - which is steep next to analysts long-term earnings forecast of 25% growth a year. But PeopleSoft bulls say it may well grow earnings much faster in the next few years, especially as it boosts profit margins. Wit Soundview's Jim Mendelson has a price target of $49 a share, which is when PeopleSoft's p-e would equal his growth forecast for 2002, while Neil Herman of Lehman Bros. thinks it can trade up to $60, thanks to strong management, new products, and improving profit margins. "It's a well run company with many happy customers," says James Governor, industry analyst at research firm Illuminata. "It has good tools and is in a position where it can make some nice acquisitions. What's not to like?" All pluses in a market dominated by stocks that have more problems than positives to report to investors.  Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column. Questions or comments? Join in the discussion at our Ask Amey Stone interactive forum Edited by Beth Belton  | | |
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