Friday, August 15, 1997

Datastream Systems, Inc.
(Nasdaq: DSTM)
Phone: 864-422-5001
http://www.dstm.com
Price (8/15/97): $24 1/8

HOW DID IT DOUBLE?

Last October, Forbes ranked Datastream Systems #34 on its list of America's 200 best small companies. With a five-year average annual return on equity of 30.5% and 17 consecutive quarters of record revenues, this developer of computerized maintenance management system (CMMS) software seemed to have found a nice niche helping companies become more efficient.

Only trouble was, the stock had been cut in half, from a high of $34 1/4, in the month before the Forbes article appeared. The sell-off apparently resulted from weakness in software stocks, heavy selling by one brokerage house, and fear that slowing earnings momentum made the stock expensive at 40 times FY96 earnings estimates. Third quarter results matched analyst expectations but confirmed that margins were declining.

The ensuing recovery stalled out following the December announcement that Datastream would pay $34 million to acquire the unprofitable Holland-based SQL Systems Group, a company with FY96 revenue of $17.3 million. Acquisition-related charges dried up Datastream's FY96 earnings. Still managing the inflow from its new tributary, Datastream also reported weak 17% EPS growth for the first quarter. The shares sank to the low-water mark of $12 1/8 in April.

But after reporting its 20th straight quarter of record revenues on July 29, these recent troubles seem to be water under the bridge. Investors fishing in this stream have been feasting of late, as triple-digit revenue growth in the second quarter produced earnings of $0.28 per share, a penny ahead of estimates and a 47% increase from the year-ago period.

BUSINESS DESCRIPTION

Datastream develops and supports Windows-based maintenance and facility management software. Its products help firms cut 10% to 20% from the cost of managing plants and equipment by helping them schedule and track maintenance and manage spare parts inventories.

Datastream's software costs between $179 for its new entry level MaintainIt Pro to $13,400 for its MP2 client-server product. Plant Engineering magazine has awarded Datastream its software of the year award in each of the last four years. Currently, over 30,000 companies use the firm's software, giving Datastream 40% of the market held by the top ten CMMS providers. Customers include numerous Fortune 100 companies.

The SQL acquisition opened the high-end of the market to Datastream and greatly improved the company's position in Europe, where SQL is a leading vendor. In the second quarter, Datastream's international sales soared to 40% of revenue as consulting revenues edged out software sales. Both have been growing at a triple-digit pace, with each now accounting for about 41% of Datastream's revenues. The rest comes from tech support.

More than 200 firms compete in the CMMS market. Competitors in the high-end and mid-range markets include MARCAM (Nasdaq: MCAM), THE INDUS GROUP (Nasdaq: IGRP), The System Works, PROJECT SOFTWARE (Nasdaq: PSDI), Revere Corp., and large vendors of enterprise resource planning (ERP) software such as SAP. On the low end, where Datastream has historically excelled, competitors include CK Systems, JB Systems, and DP Solutions.

      Income Statement
      12-month sales: $49.4 million
      12-month income: $8.5 million*
      12-month EPS: $0.94*
      Profit Margin: 17.2%
      Market Cap: $226.3 million
      (*Excludes $35.4 million in acquisition-
        related charges)

      Balance Sheet
      Cash: $1.6 million
      Current Assets: $33.6 million
      Current Liabilities: $17.2 million
      Long-term Debt: $0.9 million

      Ratios
      Price-to-earnings: 25.7
      Price-to-sales: 4.6

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Before the mention in Forbes, Datastream ranked fifth in Business Week's 1996 list of hot 100 growth stocks. While the SQL deal presented short-term challenges, the company's stellar client list and management's solid track record suggested that the stock's troubles might offer investors an opportunity.

WHERE TO FROM HERE?

CEO Larry Blackwell recently said the company continues to "dominate" the low-tier of the maintenance software market. Plus, sales of its client-server product have jumped from $0.5 million a year ago to $4.3 million in the latest quarter, up almost 100% sequentially. In July, Datastream introduced the second generation of its client-server MP2 software. It also invested $2 million in Distinction Software to become the first company to integrate supply chain management features with maintenance software.

Industry analysts project strong growth in the CMMS market. Automation Research Corp. sees sales rising from $554 million in 1996 to $1 billion in 1998 and $1.3 billion by 2000. The Gartner Group projects a $1 billion market by 2000 that will grow to $2 billion by 2002.

First Call consensus EPS estimates of $1.16 for FY97 and $1.47 for FY98 put growth at 36% over the next six quarters, giving a PEG ratio of 0.75. Considering the impact of the SQL acquisition, it might be more useful to use the 25% long-term annual growth rate and the FY98 estimate to get an aggressive YPEG valuation of $36 3/4. That means there's probably more good fishing in this stream, but the next double appears more than a year away.

--Louis Corrigan   (RgeSeymour@aol.com)

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