Monday, 30 June 2008

What the experts say

I asked a few of the analysts I know and respect for their views.

George O'Connor from Panmure Gordon replied:

I think that the "compare and contrast" with 2000 is prescient. If you recall then through 2000 companies kept on issuing positive statements which the market did not believe. Before the year was out we had a eureka moment and a sharp rise is share prices as investors said "Crikey what if they hit estimates then valuations look cheap". Q4 saw a strong rally. We had another eureka moment shortly afterwards when, on full year results, the 2001 forecasts came back leading to the second and sharper fall. I see a similar pattern this year. Currently trading on a P/E of 13.4x there is upside potential in the sector valuation - given the continued positive newsflow by October/November the sector could well rally then - but given a deteriorating environment this could well be the last opportunity to reduce holdings.

In my view it is difficult to be too clever in playing the sector. For example, we all appreciate that there should be a wave effect of increasing poor operational news which would match which vertical markets the tech companies play in and what they sell - ie first hit financial services permanent staffing company - last to be hit outsourcer in government - however the market is likely to take a sector wide approach - and hit the sector hard on the first significant weakness.

Anthony Miller from Arete Research replied:

I am more in the "Eeyore" camp on this as I just cannot see any basis for the "second half" rebound that so many analysts are predicting. I take a very simplistic view on IT spending trends, thus. Even if the 'credit crunch' ended tomorrow – and there are few who'd place a bet on that – I just can't see CFOs turning round to their CIO and saying, "OK, problem's over – go back to spending at same course and speed as before"!

First, I think they'd wait a prudent quarter or two just to make sure the crunch really was over and the lull was not just the eye of the hurricane. Then the strong temptation would be for CFOs to say (as they did after the crash), "well, we've cut IT spending to this level and the world hasn't crashed around us; this is now our new base line. Now, tell me again which of those IT projects we deferred are really going to give us a return this year." This bodes worse for software vendors than IT services, and, dare I say, better for the IT services players with strong offshore delivery, i.e. those who can deliver "more for the same" or, perhaps more likely, "the same for quite a lot less"!

As ever, SITS companies with long term contracts and a high proportion of recurring revenues usually prove more resilient during troubled times.

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