By Scott Kessler
The risk of lost or damaged information became a sobering reality after the September 11 attacks, pushing Corporate America to reevaluate its priorities. Companies are accepting the very real possibility that essential electronic databases, files and documents could be lost, and they are taking steps to safeguard their lifeblood. Information storage and recovery is now a top-tier concern for their technology departments.
Not surprisingly, data-recovery and remote computing solution providers like 4 STARS (accumulate) stock SunGard Data Systems (SDS ) and 5 STARS (buy) stock Citrix Systems (CTXS ) are in greater demand since the attacks. We at Standard & Poor's believe SunGard and Citrix already are attractive investments and will benefit with the new emphasis companies are placing on data recovery.
SunGard: Watching Over Your Data
Following the attacks, industry-leader SunGard received dozens of inquiries about its services. The company derives about one-quarter of its revenues from its Business Continuity and Internet Solutions (BCIS) segment, which offers data-recovery and Web-hosting solutions. SunGard says the September 11 attacks haven't had a materially positive impact on its BCIS unit revenues, and interestingly, more demand for its services has resulted in greater BCIS costs and expenses. However, we strongly believe that SunGard will continue to reap more business for its BCIS services as a result of the attacks.
SunGard is clearly excited about business demand and is in advanced talks to acquire Comdisco's data-recovery business. Comdisco filed for Chapter 11 bankruptcy protection earlier this year and agreed to sell its operations to Hewlett-Packard (HWP ) for $610 million in July. After making its case to the involved bankruptcy court, however, Comdisco accepted SunGard's offer of $825 million in mid-October. The U.S. Department of Justice filed suit to prevent SunGard's acquisition, suggesting that a combination of these two top industry players would be counter to antirust law. As a result, Comdisco has accepted an increased Hewlett-Packard bid of $750 million.
But SunGard has argued that the nation's data recovery industry would be strengthened -- not stifled -- by the combination. While it's unclear which of the two companies will prevail, we believe SunGard stands to benefit the most.
We expect SunGard to generate 20% annual revenue and earnings growth in its BCIS and core Investment Support Systems (ISS) segments combined. At a recent 24 times our 2002 EPS estimate of $1.04, the shares are trading below historical valuations and are attractive compared with peers and the broader market. The company's predominantly recurring revenues offer high earnings visibility, which deserves a premium in today's uncertain stock market.
Citrix: All Access
Citrix provides software and technology for thin-client/server solutions. Simply stated, the company's products enable a variety of devices including PCs, terminals and handhelds (called clients) to use complex applications via powerful corporate computers. These computers (known as servers) house and run software than can be accessed and utilized by client devices.
Citrix's offerings make possible a variety of remote computing applications, including branch office communications, telecommuting and even mobile access. These applications are vital for companies that are looking to give employees better access to information and data from a variety of locations and devices.
In late October, as many companies were reporting quarterly revenue and earnings declines, Citrix showed solid growth. Amid an economic downturn, and even after the September 11 attacks, Citrix stood its ground. The company didn't warn of disappointing third quarter results, and beat analyst expectations by a healthy margin.
Such impressive performance testifies to the company's products and performance abilities. Also, Microsoft's launch of Windows XP and Citrix's new portal solution product, which is expected by year-end, will only improve the company's growth prospects.
Citrix shares recently traded at 23 times our 2002 estimate of $1.10, which is appealing compared to other software companies and the S&P 500 index (Citrix is a component of the S&P 500.) Shares are extremely compelling, considering that we project 25% annual revenue and earnings, and we think Citrix offers a unique combination of growth and value.
As these two data-access stocks continue to play a crucial role in helping to protect American businesses, they offer something important to today's IT managers: peace of mind. And these days, that's a valuable thing indeed.
Kessler is a technology analyst for Standard & Poor's