TCS Daily


Two Techs for Tough Times

By James K. Glassman - October 1, 2001 12:00 AM

Now is when we separate the women from the girls in equity investing. Depressed markets represent some of the greatest opportunities for bargain hunting, but they also require the intestinal fortitude to buy when many people are screaming, "Sell!"

This doesn't mean that stock valuations are simply a matter of mob psychology or that every dip in the Dow is just an irrational impulse destined to be quickly corrected. Let's face it - the American economy has taken some heavy blows recently. Our country suffered an attack far deadlier than Pearl Harbor. Wall Street lost thousands of talented people. The travel industry has been decimated. And even before Sept. 11, we were already living with a slowing economy (second quarter growth was just established at 0.3%, down from nearly 6% in the second quarter of 2000) and a full-blown recession in telecom and technology.

Recent events have consequences. Not all companies will come out of this downturn tougher and stronger. Corporations with heavy debt loads will suffer. Some will rebound, some will be bought, and some will go out of business. And many companies, no matter the strength of their balance sheets, will see declines in earnings during the next few quarters, or longer.

Things are tough all over, which is why there is rare opportunity. That's because the strong companies, the ones with superior management, lots of cash and little debt, will keep rolling. And their shares may never be priced this low again. Of course, there are no guarantees, but two tech companies in particular seem built to last.

One of them is Siebel Systems (Ticker symbol: SEBL). I think there's good reason to be a long-term investor in Siebel, but I'm not sure I'd want to work there. Founder Tom Siebel is a legendary control freak who runs a very tight ship - complete with a dress code, restrictions on cubicle decoration and even a uniform color scheme for offices company-wide. And when it comes to the bigger picture and issues of corporate direction and performance, it is Tom's way or the highway. In fact, when you click on the "Executive Profiles" button on the company's website, only one executive is profiled: Tom Siebel.

The plus side of this is that there are almost no internal politics at Siebel. Everyone has pretty much accepted that Tom Siebel has a vision and a plan, the plan works, and his or her job is to implement it. So far, so good. Siebel has taken his business software company from zero to more than $2 billion in sales in just eight years. The company makes software to automate sales and marketing functions and is an increasing force in the "customer relationship management" or CRM market. The idea here is to create technology to replace, for example, telephone banks of customer service reps fielding calls and processing requests by hand. The goal is for customers to be able to get top-notch customer service and have a warm, fuzzy feeling about the vendor without ever contacting a human.

As of June 30, Siebel Systems had $1.5 billion in cash and a modest amount of debt. You can expect all software companies and many other firms to report terrible numbers for September and the current quarter - and Siebel is no exception. Sales may be sluggish for several quarters. But look at what this company is capable of doing. For the year ended in June, Siebel increased revenues by 88% and earnings by 73% at a time when the tech industry as a whole was faltering. For the first half of the year, Siebel's profits after taxes were $153 million on $1.1 billion in sales. Its stock price has tumbled from $120 to $13, and today, with a P/E ratio of about 22 (based on earnings for the last four quarters), Siebel would look dirt cheap in a decent economic environment. But if 2001 had been a normal, non-catastrophic year, earnings could easily be topping 80 cents a share, for a P/E of 16. And when the economy does eventually improve, Siebel seems poised to deliver results in that neighborhood. (Full disclosure department: I am a long-time owner of Siebel shares.)

In contrast to Tom Siebel, Richard Notebaert, the CEO of Tellabs (TLAB), will probably never be called a control freak. Modest and low-key, Notebaert is difficult to pick out as the CEO when standing with a bunch of executives. This may be one reason that investors don't seem wowed by his company. And in truth, Tellabs, a supplier of network equipment to phone companies and other communications firms, is not exactly at the bleeding edge of tech innovation. But this is a company with more than $3 billion in revenues in the last year, a history (until the second quarter of 2001) of strongly rising earnings, and some very large customers who probably aren't going away any time soon.

Balance sheet items are very important in a slowing economy, and Tellabs, as of June 30, had $1 billion in cash and just $3 million in debt. In fact, book value - or net worth per share - is $6.50 while the stock closed Sept. 27 at $9.88, down from a 12-month high of $68.50.

Tellabs has increased its earnings per share by an average of almost 40% annually during the last five years. There's nothing low-key and boring about that. Sales have slowed dramatically in recent months, along with the telecom industry, but, again, consider what will happen if Tellabs weathers this storm and earnings return to pre-crisis levels. Over the past 12 months, Tellabs earned $1.02, for a P/E of a little less than 10. But in 2000, earnings were $1.83. Using that number, the current P/E would be just 5 - compared with a current average P/E for U.S. large-cap stocks of 22.

A lot of bad news has been built into the Tellabs share price. Maybe too much. And Tellabs and Seibel aren't the only bargains out there - again, assuming that the economy recovers in the next year or two.
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