Despite being in the top 10 in its group in four of the five financial criteria, and third overall, West Kingston, R.I.-based APC came in only 31st in terms of the value of economic goodwill. The UPS company's stock price is actually down on a year-over-year basis, largely because of a 45 percent plunge on July 28 after a warning about second-half financial results.
But this may be an overreaction, given APC's clean balance sheet and its position as the market leader in its niche. APC declined to comment.
CA has suffered through a rough year. It issued earnings warnings for two straight quarters and reported a 10 percent drop in its fiscal second-quarter earnings. CA's stock price also slid 40 percent in the past 12 months. The plunge pulled the Islandia, N.Y.-based software company into the bottom five in its industry group in terms of economic goodwill. That punishment by investors, however, may have been too much, since CA now maintains a price-to-sales ratio that's a fraction of companies such as Microsoft. CA also ranked in the top half of its group in three of the five rating criteria, including a top 10 finish in return on equity. The company is moving rapidly to cement its presence in the fast-growing security, storage and management software arenas and to reduce its dependence on mainframe sales, which analysts cite as a key reason for the company's poor earnings results in the past two quarters. "We are No. 1 or No. 2 in terms of market share in areas such as security, storage management and network management," says Ira Zar, CFO of CA. "Add to that our forthcoming offerings in portal technology and business intelligence, [and we have] everything a company needs to be successful."
It's tough to be a bellwether company in the IT sector. Intel would probably like to forget the past two months, during which its stock price dropped 60 percent. But the stock plunge hasn't tarnished the computer chip giant's strong balance sheet, particularly its return on assets and return on equity. Intel ranks in the top 10 in its industry group in those two areas, and 12th overall for all five financial measures. The stock slide, however, cut the value of Intel's economic goodwill, and the company barely made the top 30 in that measure. Yet Intel still holds more than an 80 percent share in the semiconductor market. And analysts say the company's deep financial pockets offer a solid safeguard amid sluggish demand and the threat of a price war. However, Intel's growth rates in noncore areas such as networking and wireless are in the 50 percent range, and the company will introduce chips based on the Pentium 4 and Itanium technologies by year's end, says an Intel spokesman.
**Economic goodwill defined as excess of market valuation over net tangible assets, in percentage terms. Rank is within industry hroup. |
Microsoft an undervalued company? Yes, investors have gone too far in punishing the House That Gates Built. Despite a spate of high-profile problems in the past year, Microsoft finished in the top 10 in its industry group in four of CRN's five rating criteria. It ranked third overall. Over the past year, though, a 40 percent stock price drop has left the company barely in the top 30 when it comes to the value of economic goodwill. One plus for the company: The Department of Justice case has gone to the Microsoft-friendly U.S. Court of Appeals, not directly to the Supreme Court. And while Microsoft jumped into the Internet game late and faces a challenge in implementing its new .Net strategy, the company has a knack for making things work. Microsoft declined to comment.
Pomeroy, like APC, is an example of a solid company that doesn't make a big splash and gets little respect from investors. The Hebron, Ky., systems integrator ranks in the top 10 in its industry group in all five rating criteria, and eighth overall. But it just squeaked into the top 25 in value of economic goodwill. For most of this year, the company's share price has fluctuated within the $15 to $20 range. Yet Pomeroy has won new contracts and customers, reined in costs and delivered solid revenue and earnings growth. For the six months ended July 5, for example, revenue and earnings were up 29 percent and 25 percent, respectively, over the same period last year. Pomeroy couldn't be reached for comment.
Best known for its antivirus software, Symantec ranks in the top third in its industry group in all five of the financial rating criteria and sixth overall. However, the Cupertino, Calif., company ranks much lower in terms of economic goodwill, despite ongoing efforts to boost its presence in the burgeoning security market and fast-growing areas such as VPNs. Symantec's stock experienced a rough stretch this year,down 50 percent since June and down on a year-over-year basis. Given Symantec's market promise, such a decline appears excessive, even after slower-than-expected revenue growth in the corporate market in the most recent quarter. A Symantec spokeswoman says the company has a history of volatile earnings and revenue and has been seen mostly as a consumer-oriented company, rather than an enterprise provider. However, she says, Symantec is enjoying a turnaround under CEO John Thompson, a former IBM software executive, and company executives believe their growth prospects remain strong.
Despite a solid balance sheet, strong third-quarter revenue growth of $870 million and 48 percent year-over-year jump in earnings, Tellabs has seen its stock price fall more than 20 percent over the past year. With the decline, the Lisle, Ill.-based global communications provider didn't make the top 20 in terms of economic goodwill, despite top 10 finishes in three of the five rating criteria. It finished sixth place overall in its industry group. Tellabs has a diverse product and services base, including hot-button areas such as wireless and optical networking. Tellabs couldn't be reached for comment.
One might ask how a company trading in the $150 per share range can be undervalued. But VeriSign ranks in the top half of companies in its group in three of the five rating criteria. More important, the Mountain View, Calif.-based company has a big equity base, and despite the high share price, the value of its economic goodwill is very low compared with that of its peers. This fast-rising Internet security provider also is well on its way to establishing an industry standard in digital signatures. VeriSign couldn't be reached for comment.
Viant, Boston, has suffered from overblown expectations and a rapidly changing market, as have many other Web services firms. In the past year, Viant's stock price plummeted 82 percent, a fact that kept the company out of the top 30 in its industry group in the value of economic goodwill. Yet Viant ranked much higher in areas such as return on assets, return on equity and debt-to-equity ratio. It came in 13th overall under CRN's five financial criteria. Like other pure-play Web integrators, Viant faces a challenge in turning around its business as competition from big consulting firms heats up. But the company has a sturdy balance sheet and capable management, and it unveiled plans to add wireless technology to its existing services. A Viant spokesman declined to comment on the company's market valuation.
Of the companies on CRN's list, Xilinx was the only one to rank first in its industry group in terms of return on assets and return on equity, and was first overall. The San Jose, Calif., maker of programmable logic devices also has no long-term debt. Xilinx ranked in the top half of its group in the other two rating criteria. Moreover, Xilinx reported an 83 percent year-over-year increase in its fiscal second quarter, and earnings nearly doubled. Strong demand in North America and the growing success of key product lines fueled the gains, according to the company. But Xilinx's stellar balance sheet, strong management and vibrant performance didn't lift it into the top 20 in its industry group in terms of economic goodwill, although the company's stock price nearly doubled over the past year. Xilinx's CFO, Kris Chellan, says the company has parts of its business touching the communications field and parts touching the semiconductor field. Xilinx did not benefit when the communications sector received a market boost from the market, she says, yet it was punished when semiconductor stocks were hit hard by Wall Street. As a fabless semiconductor company, Xilinx feels "quite bullish" about its product cycle and remains upbeat about recent agreements it has reached with IBM, Chellan says.
CRN's list of the 10 most overvalued and undervalued companies is based on a comparison of "economic goodwill" against five financial criteria. CRN defines economic goodwill as a company's market capitalization minus the net value of tangible assets. This reflects the additional value that the market has assigned to a company, based on intangible assets,such as quality of management, growth prospects and efficiency of operations,that don't appear on a balance sheet.
The five financial ratings used by CRN were return on assets, return on equity, debt-to-equity ratio, the percentage growth of earnings divided by the percentage growth of revenue, and the value of economic goodwill divided by the value of tangible assets. Sanford C. Bernstein, an independent consulting firm, supplied CRN with raw data from 980 technology companies, each in existence for at least three years, in 10 different industry groups. CRN then reduced the list to the top 40 to 50 companies in each group based on market capitalization. Next, the value of economic goodwill as a percentage of tangible assets was determined for each company. Companies were ranked from highest to lowest within their industry group. Each company also was ranked from highest to lowest within their industry group based on CRN's five financial criteria. The individual rankings then were averaged to yield an overall ranking. That overall ranking was compared with individual company rankings for economic goodwill. If a company's goodwill ranking was higher than its overall ranking for the five criteria, then it was defined as "overvalued" against its peers in the industry group. The greater the difference between the two rankings, the higher the degree of overvaluation. The 10 companies with the greatest difference between the two rankings,regardless of industry group,were the most overvalued firms. Similarly, if a company's goodwill ranking was lower than the overall ranking, then the firm was defined as "undervalued." The bigger the difference between the rankings, the bigger the degree of undervaluation. The 10 companies with the greatest difference between the two rankings,regardless of industry group,were the most undervalued firms. |
|
10 Challenges That HP Wants Partners To Tackle Right Now CRN speaks with HP's business unit chiefs to get a sense of where they'd like partners to focus in the coming year, as well as how CEO Meg Whitman is making a difference. |
|
VAR500: IBM Strikes Deal With Ukraine Bank; HP Bolsters Health-Care Practice CRN VAR500 solution providers win health-care contracts, work on European banking solution, create a platform for microlending, sharing info on cloud computing and more. |
|
Five Companies That Dropped The Ball This Week For the week ending Feb. 3, CRN looks at five companies that were either asleep at the wheel or just didn't make good decisions. |
 More
Slide Shows |
