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4/11/2003
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Taking Stock: Spring Numbers Don't Smell Too Sweet

Accounting changes may have a noticeable effect on tech stocks

It's April--shortly after the end of the first quarter but before the landslide of company earnings reports. It's also the season of "preannouncements," when companies warn if their results will be much different than expected. A few of these may contain favorable news, but, unfortunately, most of them won't. And you can imagine what unexpected bad news does to share prices.

Let's look at some of the most recent victims: PeopleSoft, Siebel Systems, and Microchip Technology. PeopleSoft's warning wasn't a big surprise. It depends on large enterprise deals and few are being done. The company might actually continue to gain market share during the downturn, although all enterprise resource planning vendors may see declining sales in absolute terms. PeopleSoft will produce license revenue of about $80 million to $85 million, below Wall Street estimates. Total revenue for the first quarter of this year is expected to be $450 million to $455 million--thank goodness for upgrades and services revenue. This will result in earnings per share coming in at 1 or 2 cents. The company is still projected to earn 53 cents per share this year. The stock trades at $15, a 2003 price-to-earnings multiple of 28.

Siebel, a major customer-relationship management software vendor, also preannounced lower revenue and earnings for its first quarter last week. The company is projecting license revenue of $112 million, a decline of 50% year over year. Total sales are projected to come in around $330 million to $350 million. More important, operating income is likely to be negative. CRM suffers from the global business blues but also the hangover of a very tough competitive environment that isn't likely to go away soon. Consensus Wall Street estimates are for earnings of 15 cents per share in 2003. At $8 per share, the stock still trades at 53 times the 2003 price-to-earnings multiple, not exactly a cheap stock. Even if you back out the large amount of cash on the balance sheet, the multiple remains north of 40 times the price-to-earnings ratio.

Microchip Technology, a leading manufacturer of microcontrollers and analog chips, just preannounced its fiscal 2003 fourth-quarter earnings--again. The company announced lower sales twice in three weeks. Microchip had been one of the more stable and, therefore, best-performing chip companies. With increased uncertainty of Microchip's business prospects, market analysts will use higher discount rates on forecasted future profits, thereby putting downward pressure on the stock valuation.

And if preannouncements aren't enough, accounting rule changes will likely require publicly traded companies to start expensing stock options. Siebel and PeopleSoft will see significant negative impact on their earnings per share, as will many technology-related companies. The technology industry has been fighting this accounting change. Companies such as Intel have chosen not to expense options but make them a bigger disclosure item in the footnotes of their annual reports. A big part of options' value is directly tied to the volatility of the share price. We all know how volatile technology share prices have been, so the theoretical option expense is likely to be higher for technology stocks than, say, a stable, boring consumer-goods stock.

All in all, I don't like how the IT landscape is shaking out this early in the year. Valuations still seem too high on traders' fears that they'll miss the war rally. After the war, business recovery may well be slower than expected.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.

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