Safe-Haven Stocks in Software: Nomura
Nomura reduced its estimates on the software sector on Monday. Concerns about Europe and slowing IT spending in North America were central in Nomura’s decision to trim estimates for numerous software companies. One analyst said that while the sector in general is suffering, it may still be a safe haven for investors.
“I think it’s going to be a rough couple of weeks getting through earnings season,” Rick Sherlund, Nomura head of technology equity research, told CNBC’s “Squawk on the Street.” “You have to set the bar a little lower for what the market has been telling us for the last couple of months — business is going to get tougher.”
Sherlund cited regional weakness in Europe, China, and North America as a cause of concern. He explained that these slowdowns hurt IT spending and create a currency headwind.
“If business is tougher, you’ve got more of a currency headwind,” Sherlund said. “The currency is going to be about a 9 percent headwind versus expectations of about 7 percent just a couple months ago.”
Given the tougher macro environment, Sherlund expects companies to be cautious with guidance. “I think there is going to be opportunity for these stocks, I’m just not sure you want to step in ahead of the print,” Sherlund said citing companies with reasonably attractive valuations such as Microsoftand Oracle as a source of his confidence.
Software Companies ‘Stretch’
Sherlund said that software companies had to “stretch” last quarter to meet estimates. He explained that in a healthy environment it is common for deal offers to spike during the first days of a new quarter. This is a sign that the company did not need the deals to make their numbers.
“We’re not hearing any of that this quarter,” Sherlund said noting that many companies such as VMWare and Citrixneeded to work harder to meet estimates. These companies used every deal offer in order to reach their numbers for the quarter.
Sherlund continues to watch discounts to predict how earnings season will play out. He explained that discounting can be viewed as robbing the next quarter. “You might have pulled out some of the stops to make this quarter,” Sherlund said. “But what about next quarter?”
Software Safe Havens
Despite recent weakness, there is still money to be made in the sector, he said.
Sherlund said that securities is a safe place in software. “In good times or bad you still need securities software,” he said.
Nomura is not cutting estimates on SAS companies such as Cornerstone On Demand and Salesforce.com. Sherlund explained that these companies have less fundamental risk because they do little European business. “They are in the sweet spot of the market, in the SAS space, which is growing very rapidly,” he added.
Sherlund’s top “buy” recommendations are Microsoft, Oracle, SAP, and Salesforce.com.
Palo AltoNetworks is another company to watch. The software security company is scheduled to make its public debut in July and is expected to be valued near $2 billion. Sherlund said Palo Alto will likely continue to be a strong competitor against Check Point.
—BY CNBC.com’s Madeline Laskoski
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