The $5.35 Software Bargain

An earnings warning, a brokerage downgrade, and the confusion over the Oracle (Nasdaq: ORCL) merger with PeopleSoft (Nasdaq: PSFT) is taking its toll on application software vendor Lawson Software (Nasdaq: LWSN). The stock is down 12% today and setting a new 52-week low.

On the surface, the near-term outlook is bleak. Analysts expected earnings of $0.03 a share. Because of "lower business activity, longer customer decision cycles, and contract deferrals" (the same mantra other software vendors are using), the company expects breakeven results the next time it reports earnings.

But look at the balance sheet. Here is a company with $370 million in annual sales and a net cash position of almost $200 million. That's a lot of cash!

What doesn't look good is the company's 7.1% operating margin. Consider, though, that PeopleSoft has a 4.6% operating margin and Oracle is willing to pay almost 3 times sales to get its customers.

Lawson, selling at 1.7 times sales, would be an interesting acquisition play if it were not for its poison pill -- but that didn't stop Oracle's PeopleSoft hopes, and Lawson is on the short list of companies Oracle's CEO has mentioned in court testimony as interesting acquisition targets.

In the Department of Justice case against Oracle are the seeds for considering Lawson. Human resources (HR) and financial software are identified as the place where the anti-competitive threat is the greatest. Lawson was recently cited as a leader in HR software, and its financial software clients include those in the financial services industry.

Also being overlooked is the impact of Oracle's purchase of PeopleSoft (which recently acquired J.D. Edwards). These combinations are making it easier for Lawson to get seen -- especially when companies want to consider three or more vendors.

There are other reasons to consider Lawson. Their software can run on multiple databases -- from Oracle, IBM (NYSE: IBM), Microsoft (Nasdaq: MSFT), or others. Their software can also run on multiple operating systems. That combination of flexibility is a strong selling point.

At $5.35 a share, the company trades at 20 times next fiscal year's earnings. With cash, a product where the DOJ sees little competition, and a product with customer pleasing flexibility, today's stock action provides long-term investors with a bargain.

Discuss Lawson Software and Oracle -- and thousands of other stocks -- on the Fool discussion boards.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned, although, as an IT consultant, W.D. is familiar with most of these vendors.