Boring Portfolio

<THE BORING PORTFOLIO>
The Uncertainty Consensus
The ERP outlook

by Alex Schay (AlexWS@fool.com)

ALEXANDRIA, VA (Jan. 29, 1999) -- Sell! Sell! Sell! As Dale noted in the last column, our inherited holdings are shrinking fast, and we are presently in active pursuit of companies trading below their intrinsic value. On the Boring message board, a question arose concerning the status of German enterprise resource planning (ERP) firm SAP Aktiengesellschaft (NYSE: SAP), and its presence on the vaunted "watch list." Well, be assured, we're still watching it.

An interesting phenomenon has emerged in the enterprise wide software arena, and for lack of a better phrase I'll call it "the uncertainty consensus." Whenever the Street can't see past the next quarter, it invariably leads to downgrades -- out of professional necessity -- until the fog begins to clear. Of course, I'm exaggerating, but usually this consensus is a reflection of industry conditions as communicated by the actual participants in the business. Sometimes this can occur to just one company, like Amgen (Nasdaq: AMGN) at the end of 1997. However, after having listened to the PeopleSoft (Nasdaq: PSFT) conference call today, it has become pretty clear to me that this "uncertainty consensus" has solidified like concrete around the ERP group as a whole.

Of course, much of the action in the paper over the last couple of months has been in response to slowing growth rates -- it's kind of hard for a company like SAP to sustain the growth that it experienced between 1993 and 1997 (net income grew from $88 million to $555 million). However, chatter about the Year 2000 problem and the possible repercussions that it will have on information technology (IT) budgets in 1999 has risen to a deafening roar.

Whenever you hear one pat, causal factor continually bandied about in the popular press as a reason for the decline of a whole segment of the economy, take note, and then take a closer look. The "brown shoe craze" as a reason for the athletic shoe decline comes to mind; granted it could wind up being multiple pat, causal factors coming together, like "Asia + bloated channel + brown shoe = Nike." Anyway, in the enterprise wide software industry, rumblings about 1999 spending budgets have been reverberating throughout the group for a number of months. This is evidenced by the following excerpt from a Lehman report issued at the beginning of November of last year:

"Over the last month we have called over 100 corporate CIOs to assess the outlook for IT services spending in 1999. We spoke with about 20 CIOs, from Sears, Texaco, Knight Ridder, Northern Trust and other companies. In our view, fears of overall IT budget cuts in 1999 are erroneous. We estimate that average growth in IT budgets will moderate to about 5-7% in 1999 from growth of 10-12% in 1998, but not decline. The outlook for IT services spending is less positive. Over 80% of respondents indicated that spending on custom software development will be severely curtailed and/or that reliance on consultants will moderate in 1999. Reduced demand for traditional custom software development is based on the shift to packaged software solutions, Y2K displacement, growth in Web-based design and development, and an overall maturation of the sector."

On the PeopleSoft call, the firm announced that it expects 1999 revenue-growth between 20% to 30%, compared with an early December 1998 estimate of 25% to 35%. It also cut back its 1999 operating margin goals to 16% -18%, from a previous target of 18% -20%. Implicit in PeopleSoft's top line forecast for the first quarter of 1999 was a decline of roughly $21 million year over year, made up by successive quarters of beating year over year figures by around $40 million (in order to jibe with overall growth estimates). That kind of growth in the midst of an "uncertain" spending environment made analysts' leery, and was part of the reason for the company's decline of $2 5/8 to $19 13/16 today.

PeopleSoft is doing some interesting things in the Internet space, not as an extension of its ERP business, but as a class of enterprise performance management products that can stand alone (with the theme of integrating external data into work environments). In fact, CEO Duffield, dubbed 1999 the year that PeopleSoft "helps its customers fully integrate into the Internet economy." With $480 million in cash on the balance sheet and $393 in cash flow from operations, the firm is certainly not facing any funding concerns. The questions for us right now are more about getting a handle on the firm's myriad software offerings, and gathering some scuttlebutt on why companies might need the firm's software.

Okay, we barely scratched the surface here, but as I stated in the opening, Dale and I are still keeping an eye on the segment (so don't fret). First, let me make a brief comment (read: plug) about the Motley Fool News. If you're not reading it -- you should start. Both Dale and I began our Foolish careers on that end of the business, and we are still active contributors to the product. It's a great way of finding investment ideas and tracking firms that may be of interest to you. Until next week, see you on the boards.

Call Your Boss a Fool.

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01/29/99 Close
Stock  Change    Bid
BRKb  +6       2150.00
CSL   +  1/16  46.63
CSCO  +2 5/8   111.50
PNR   +  3/16  38.25
                   Day    Month   Year  History
        BORING   +1.02%  -1.65%  -1.65%  32.06%
        S&P:     +1.09%   4.07%   4.07% 112.51%
        NASDAQ:  +1.15%  14.28%  14.28% 140.73%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    111.50   365.45%
  8/13/96  200 Carlisle C    26.32     46.63    77.11%
 12/31/98    8 Berkshire   2244.00   2150.00    -4.19%
  4/14/98  100 Pentair       43.74     38.25   -12.56%


    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  25087.50 $19697.51
  8/13/96  200 Carlisle C  5264.99   9325.00  $4060.01
 12/31/98    8 Berkshire  17952.00  17200.00  -$752.00
  4/14/98  100 Pentair     4374.25   3825.00  -$549.25


                             CASH  $10594.54
                            TOTAL  $66032.04



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