Services Companies Await E-Business Boom
By Bill Loomis
Integrator stocks declined during the first two weeks of June, following the lead of the Internet stocks and reflecting investors' increasing concerns about second-quarter earnings and the impact of year 2000 spending on non-Y2K projects.
But any potential project deferrals caused by the year 2000 computer glitch are likely to be temporary, and investors likely will look beyond these issues near the end of the third quarter.
By the third quarter, information technology services companies should have good visibility on their business prospects for the remainder of the year and some insight into early 2000.
As a result, I do not expect the sector to fully recover from concerns about the year 2000 computer problem until late third quarter.
Later this year, the sector will benefit from a shift in investors' perceptions from information technology services companies being hurt by Y2K, to IT services companies helping businesses and governments move to the Web.
The evidence of a potential slowdown in IT spending in the second half of 1999 is building. Over the past quarter, leading integrators have made downward earnings revisions, including Complete Business Solutions Inc. of Farmington Hills, Mich.; Computer Horizons Corp. of Mountain Lakes, N.J.; Keane Inc. of Boston; and Metro Information Services Inc. of Virginia Beach, Va.
In the past week, Annapolis, Md.-based Condor Technology Solutions' shares dropped 56 percent following the integrator's announcement of lower-than-expected earnings. The company blamed Y2K-related spending deferrals for the shortfall.
While some investors may believe that Y2K concerns already are priced into the sector, the 30 percent to 50 percent one-day stock price drops in Condor, Complete Business Solutions and MISI following disappointing news, indicate otherwise.
The government integrators do not seem to be facing the same Y2K budget concerns as their commercial counterparts.
This might be because the government lags the commercial sector in its Y2K programs by six to 12 months, resulting in potential business weakness late this year as government clients reassess their IT needs following large spending to correct their software.
A more immediate concern is the potential short-term impact of U.S. military operations in Kosovo on non-operational defense spending.
A year from now, the business landscape probably will look quite different as e-business projects take off, Y2K falls behind us and pent-up demand from delayed information technology projects begins flowing.
Meanwhile, Lockheed Martin Corp. announced that it expected sharply lower earnings than analysts were estimating, sending its shares tumbling 19 percent.
Bethesda, Md.-based Lockheed Martin expects a loss in the second quarter of 10 cents to 15 cents a share, compared with analyst estimates of a profit of 72 cents.
The shortfall stems from delivery delays on the C-130J program, problems with its launch vehicles, and the delays of launches and commercial satellite deliveries.
Such a large shortfall in earnings seems surprising given the improved long-term outlook for defense spending, following more than a decade of sharp cuts and the synergies that were supposed to be the result of industry consolidation.
Overall, the Washington Technology Composite index dipped 2.3 percent for the two-week period ending June 11. The Dow Jones Industrial Average was off 0.7 percent for the same period.
Bill Loomis is managing director of the Technology Research Group at Legg Mason Inc., Baltimore. He can be reached at email@example.com. This information should not be construed as advice designed to meet the investment needs of any investor.