Financial Analyst Doesn’t Like What He Sees in SAP’s Future

I’m not a financial expert, I’ve never played one on TV, and I didn’t stay at a Holiday Inn Express last night.

But it doesn’t take a Nobel Prize-winning economist to see that Merrill Lynch analyst Raimo Lenschow does not like what he sees in SAP’s immediate future, as he has just downgraded the rating on SAP’s stock from “Buy” to “Neutral.”

“SAP, as a defensive investment, has worked well versus the market in the first part of the recession but will struggle to maintain this momentum as the focus shifts to recovery scenarios,” Lenschow writes this week in a research note, as reported in Barron’s.

Defensive investment? That doesn’t sound good.

“We do not see a recovery in general corporate IT spending in 2009 as IT budgets have been set and will unlikely be changed upwards mid-year,” Lenschow adds. “Hence, we see some risk to SAP’s [second half] license assumptions.”

Financial guidance from big tech companies such as SAP (the maker of ERP, CRM, supply chain and BI applications) has been in short supply and typically vague. Assumptions (half-baked or otherwise) are the simply best anyone can come up with in this economic climate.

So, to be fair, who’s to say Lenschow’s assumptions are any better or worse than SAP’s (or Oracle’s, for that matter)?

The German software giant’s stock on the NYSE has been on a roller-coaster ride since last fall—hitting the mid-$50s before the global financial collapse and then dropping to the low $30s, with some nice twists and turns in between. The software sales cycle bravado that was apparent during summer 2008 quickly turned to fear and loathing, as the sauerkraut hit the proverbial fan in the fall and winter.

Lenschow has done his part to ensure a lively ride for SAP: He downgraded SAP’s stock in November 2008 from “Buy” to “Neutral,” raised his rating back to “Buy” in January 2009 (citing SAP’s smart “cost cutting” strategies), and then changed course again with the latest downgrade.

A rough estimate of other financial analysts following SAP (according to Yahoo! Finance’s Analyst Opinion page) indicates that there are some selling, some buying and many others “Holding” on SAP’s stock. Which is quite apt for this uncertain economic climate.

There are many factors that I don’t understand regarding how financial analysts determine “Buys” or “Sells” and assign value to companies today. In fact, I tried to interview analysts from Credit Suisse, Goldman Sachs, Morgan Stanley and UBS (among others) about how they value enterprise software companies, and how much the CEOs of the vendors really matter. The analysts I contacted cover SAP and Oracle very closely.

Of course, these analysts are a very select Wall Street club, and a club with valuation formulas that have always been shrouded in secrecy. At this moment in time, the club members’ parent companies themselves are hurting financially like never before and are keeping a low profile.

Not surprisingly, not one analyst would speak with me regarding forming valuations.

Today, the day after Lenschow’s report and new rating came out, SAP’s stock is bouncing around in the low $40s. Where is the stock headed? Who knows for sure.

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