RBC Capital software analyst Robert Breza Tuesday morning turned bullish on the software sector, asserting that the first quarter should be the nadir for fundamentals in the group. “The next several quarters should see reduced earnings risk, easier comparisons, lower FX headwinds, stimulus spending benefits in many verticals and the formation of a solid fundamental and valuation basis to grow from,” he writes “The hill ahead still looks steep and bumpy, but we think that is little room to fall based on the backdrop.”
Breza raises his ratings on a host of stocks, including Microsoft (NASDAQ:MSFT), Adobe (NASDAQ:ADBE), Concur (NASDAQ:CNQR), Omniture (OMTR), Salesforce.com (NYSE:CRM), Symantec (NASDAQ:SYMC), Taleo (NASDAQ:TLEO) and Digital River (NASDAQ:DRIV). Here are some details on his calls:
- Microsoft: To Outperform, from Sector Perform. Target to $27, from $20. He contends PC sales have likely bottomed, and that a recovery will benefit overall sales. Windows 7 launch should be a positive. Expect margin boost from tighter controls on hiring.
- Adobe: To Outperform, from Sector Perform. Target to $30, from $23. Breza thinks weakness in Creative Suite 4 demand could lead to stronger sales of the next generation, CS5. Channel business is firming; downside to earnings is limited “as necessary steps to protect earnings have been taken, including a proactive 8% headcount reduction.”
- Concur: To Sector Perform, from Underperform. Target remains $24. “Although fundamentals will likely remain challenged, valuation downside at current levels is likely minimal.”
- Omniture: To Outperform, from Sector Perform. Target to $18, from $11. He says management’s revenue growth target of 15%-20% in achievable, and that “downside to earnings and cash flow is limited.”
- Salesforce.com: To Outperform from Sector Perform; target to $45, from $37. Breza notes that the company is growing faster than its peers in the software-as-a-service category. “Longer-term, we believe CRM’s unique ecosystem will continue to provide benefits that are difficult to quantify and not likely reflects in current caluations (i.e., integration with Facebook, Twitter, etc.)”
- Symantec: To Outperform, from Sector Perform, target to $20, from $17. He contends earnings downside is limited give recent cost cutting moves, and says there is more operating margin leverage possible in FY 2010. He also says the company’s portfolio of enterprise, SMB and consumer security software provides a buffer to a slowdown.
- Taleo: To Outperform from Sector Perform; target to $16, from $12. He notes that the recent earnings restatement has been completed and management can focus solely on th business again. He adds that the company continues to take share with its flagship recruiting software.
- Digital River: To Outperform from Sector Perform, taret to $40, from $25. He says average deal size and traffic volumes have stabilized or slightly improved in Q1; he sees possible earnings upside. “The migration of the consumer online is a long-term trend that should benefit DRIV and the expanded portfolio should reduce customer dependence.”
I’d also note that for two of the stock’s Breza upgrades, other analysts this morning weighed in with downgrades which seem to be carrying more weight.
- Susquehana Financial analyst James Friedman cut his rating on Taleo to Neutral from Buy, noting that the stock has reached his price target. He also notes that checks find heavy discounting by competitors, and that “this will be a tough year to maintain bookings growth.”
- Citigroup’s Brent Thill cut his rating on Omniture to Hold from Buy on a valuation basis, noting that the stock has rallied 75% from its January low.
In Tuesday’s trading:
- Microsoft is up 23 cents, or 1.2%, to $18.99.
- Adobe is up 17 cents, or 0.7%, to $23.36.
- Concur is up 79 cents, or 3.5%, to $22.
- Omniture is down 38 cents, or 2.6%, to $14.27.
- Salesforce.com is up 91 cents, or 2.5%, to $37.39.
- Symantec is up 10 cents, or 0.6%, to $16.18.
- Taleo is off 78 cents or 6.3%, to $11.56.
- Digital River is up 15 cents, or 0.5%, to $33.21.