Online Extra: BEA Systems: An Oracle in the Making?

Its stock price is down now, but as the leader in the vital applications-server market, it could become a giant

Despite the dismal performance of tech companies over the past year and the disintegration of Internet stocks, a hardy group of investors still believes in the Web. Witness the intrepid players who have bought BEA Systems (BEAS ), an e-applications software company. Founded by former Sun Microsystems executive Bill Coleman in 1996, BEA makes application-server software designed to integrate diverse computer networks using multiple operating systems and software packages. It's like the glue that holds corporate Web operations together.

It's true, BEA stock has dropped 21%, from around $48 to around $38 a share, over the past 12 months. And with its current price-to-forward-earnings ratio at 97, twice the company's projected five-year annual earnings growth rate, it would be easy to say the stock resembles other highfliers before they shriveled in the Nasdaq meltdown.

But not to worry. BEA's software is apparently so vital to large corporations that its sales seem immune to the capital-spending downturn plaguing the rest of the tech sector. And the upside potential long term is big. At its current price, BEA is far from cheap, but it's still worth considering.

POSITIVE SIGNS. No question, buying a stock like BEA is a bet on the future of a technology sector, always a risky proposition. Just ask the sad folks who bought into the wireless bubble based on expectations the sector would soar. Or the crushed investors in e-procurement specialist Ariba, who have watched their once-touted stock decline 96% from its 52-week peak of $173.5, to $6.5.

Still, BEA has lots of positive signposts. The company's big product is WebLogic. This application-server software package is the equivalent of an operating system for e-commerce. It allows companies to smoothly mesh disparate pieces of software to create customized e-commerce operations. On the back of WebLogic, BEA Chairman and CEO Coleman claims the company will manage roughly 50% growth in both its top and bottom lines for the next five years. You heard that right -- a company whose product depends on the growth of e-commerce is predicting annual sales and earnings growth of 50% over the next five years.

Sounds ludicrous? Maybe not. Demand for WebLogic hasn't slackened in the least. In fact, the company continues to face a huge order backlog that should enable it to easily make first- and second-quarter sales targets. "Making their earnings guidance won't be that hard for the next two quarters, and probably not for the third," says Erick Brethenoux, analyst at Lazard Freres.

LITTLE BIG BLUE. The growth comes from necessity. Most of BEA's 8,000 clients are big corporations that want an integrated application-server system to provide reliable access to and management of their Web operations. They don't see BEA's product as a luxury. "The applications server is becoming a boring, accepted piece of the software landscape that'll be there no matter what," says Paul Krieg, analyst at Legg Mason. In short, companies now buy applications-server software the way they buy Microsoft Office -- without even thinking about it. And BEA has arguably the best product in the field.

That's not to say BEA has no competitors. It has 26% of the market -- and a little company called IBM (IBM ) is in second place, with a 20% share, according to Giga Information Group. But IBM's software isn't integrated like BEA's. "IBM has good software pieces, but it's hard to put them all together," says Lazard's Brethenoux. And IBM may be more interested in consulting than software anyway, he adds. Big Blue happily services BEA's software as well as its own. So far, the most recent version of WebLogic is selling better than the latest version of IBM's similar offering, called WebSphere, claims Brethenoux.

And few doubt that BEA will lose its competitive edge. A charismatic Air Force Academy graduate, Coleman inspires confidence among analysts. "The reason BEA is No. 1 in this market, and someone like IBM or Sun Microsystems isn't, is execution," says Legg Mason's Krieg. "BEA's management has some of the best competitors I've seen in this business. They know their market, and they're focused."

WIDESPREAD TARGETS. Many analysts maintain that the combination of the company's leadership position in applications-server software and its top-notch management justifies a much higher stock price. According to First Call, the consensus of analysts is that the company will generate earnings of seven cents a share in fiscal first-quarter 2002, which will end Apr. 30. That compares to a loss of three cents a share at the end of fiscal first-quarter 2001.

Earnings per share for all of fiscal 2002 should hit 40 cents, vs. four cents in 2001. Revenues will grow from $819 million in fiscal 2001 to $1.2 billion in fiscal 2002, a steep 46% increase. The range of analysts' 12-month target prices runs from $30 to $95, without much bunching up at either end of the spectrum, according to First Call Research Director Chuck Hill.

That range shows how hard it is to figure out the potential of a company with a product like BEA's. But it also implies opportunity -- no one thinks the stock has much downside right now. "BEA could be Oracle (ORCL ) circa the mid- to late-'80s," says Krieg. With its current order backlog almost guaranteeing good results for the next couple of quarters and with the recent dip in its stock price, investors couldn't be blamed for taking a chance on BEA. Even if it doesn't turn out to be the Oracle-equivalent of the applications-server market, BEA should still have some pretty good growth ahead of it.

By Margaret Popper

Edited by Alex Salkever

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