In IT, these issues have ‘it’
Dear Mr. Berko:
My broker has suggested I buy 100 shares each of Storage Technology Corp. and CheckFree Corp. as a conservative way to invest in the information technology industry. Please tell me what you think.
F.L., Syracuse, N.Y.
Give that broker two 24-karat gold stars, because I think he’s not only right as rain but smart as a whip.
Both these companies have superb balance sheets, excellent business plans, talented management, superior products and recognized leadership positions in their respective fields. Both CheckFree and StorageTek should provide investors with above-average growth potential for an acceptable risks.
It’s evident that a gradual but slow fundamental recovery is under way for this sector. Both of these mid-cap companies have impressive institutional ownership as well as a strong following on Wall Street.
Storage Technology Corp. (STK-$24.80) is in the data storage business. This $2 billion revenue company designs, manufactures and markets tape subsystems, retrieval disks and network storage systems for high-performance computers. STK also provides maintenance contracts for its customers, as well as consulting services.
The company’s broad range of storage products for digitized data are designed to permit universal access to data and storage networks in mainframe and open-system environments. STK generates 63 percent of its revenues from storage products and the remainder from services contracts.
Many of its information technology peers have been unable to maintain their revenue base in a saturated IT environment. However, STK is steady Eddie because its client base views the company’s cornucopia of tailor-designed technologies, systems and products as the most cost-effective method in which to store information.
Though demand has been weak in recent years, Storage Tek’s emphasis on service has offset slow sales for its products. Wall Street analysts expect a strong pickup in demand for subsystems, disks and storage systems next year.
The company has a sweet balance sheet, zero long-term debt and a $12 book value, which includes nearly $7 in cash. Based upon a cash flow analysis (Standard & Poor’s), STK trades at about a 40 percent discount to its peers. It is on track to earn $1.18 to $1.22 per share this year and next year could post earnings of between $1.38 and $1.44.
If you ascribe a reasonable price-earnings ratio of 25 to the shares, STK could trade in the mid-$30s. I feel that STK is a high-class IT bargain, considering the fact that during the hubris of 1999 and 2000 the stock traded above $100 a share (split 2-for-1) and had a P/E of over 80.
CheckFree Corp. (CKFR-$21.43) is the No. 1 provider of financial electronic commerce products and services. Management has divided the company into three distinct divisions:
1. Electronic commerce, which enables consumers to receive and pay bills electronically. This division accounted for more than 72 percent of last year’s $490 million in revenues. It may be the fastest-growing sector of the company. CKFR’s system lets users receive and pay bills electronically via the Internet as well as perform normal banking transactions. Its subscribers include Bank of America, Charles Schwab, Wells Fargo & Co. and J.P. Morgan Chase & Co.
2. Investment services (16 percent of revenues) provides a broad range of resources to investment advisers, brokerage firms, banks and insurance companies. These services include graph reporting, performance measurement and account analysis. The division trains personnel on system use and provides technical network support as well as system interface setup.
3. Software (12 percent or revenues) is responsible for program maintenance and professional services to the other divisions, as well as other financial service providers.
CheckFree went public in 1995 at $15 a share, and with the exception of a fluke in 1999, it hasn’t yet had a profitable year. However, aided by a tremendously strong balance sheet and extremely capable management, CKFR’s momentum is finally beginning to pay off.
Wall Street analysts expect the company to have a per-share profit of 25 cents next year. Revenues could explode from $570 million this year to more than $1.5 billion in 2007-08.
The wild IT market of 1999 and 2000 pushed CKFR’s share price well above $100. The shares are a smart gamble, but at $21.43 apiece, they are also a timely purchase for those who can assume above-average risks.
Wall Street analysts believe CheckFree’s shares could trade in the $70s during the coming four years. With a reasonable P/E of 25, I think it’s an advisable purchase.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at firstname.lastname@example.org.