Software and IT Services commentary

I work on the basis that if other analysts are going to quote me, then I'm sure they will be happy for me to quote them!

On Monday, George O'Connor from Panmore Gordon presented his outlook statement for the software and IT services sector.

"After five years of sequential growth, IT spending growth is set to fall in 2008 to a more modest rate between 3% and 6%. So, conclude industry analysts AMR , IDC and industry luminary Mr Richard Holway. Gartner sees growth at 5.5% down from 8% in 2007E. We note: (1) product cycles are typically stronger than the economic cycle – so we are relaxed about the prospects for well-placed product companies like Autonomy, Aveva, Fidessa, Micro Focus and Innovation. (2) the tussle between discretionary and non-discretionary IT spend remains unclear and this will throw up surprises in the coming months. Lower spending increases forecast risk, but at 14.3x P/E the market is discounting much of this already. Investors looking for high alpha and low-cost beta should in our view stick with the Elites".

For the much longer, pdf version, click here

Ian Spence in Megabutye today, however, concludes that "we continue to believe that, as financial services contagion continues to spread that the 12-24 month outlook for the sector is poor and that 2008 will be a very tough year for the sector".

As readers know, I too am 'gloomy' towards the outlook for the economy (in the US and UK in particular because of their respective high debt and reliance on the 'feel good' factor of rising house prices), for IT (where I fear a downturn in consumer tech spend after Christmas to add to a gloomy 'enterprise' spend outlook in particular in the previously high growth areas of Public Sector and Financial Services) and for tech shares (the market currently is so illiquid that a small sell order can send the shares crashing).

I really don't buy the P/E story. What other non growth or declining sectors command 14+ P/Es? Sub 10 seems about right to me! Of course, there will be exceptions. As ever, it is spotting the "above average" exceptions that will be key. "Average really isn't good enough anymore". But I think I have made that comment many times in since 2000.