Great stocks on sale

Kiplinger's Personal Finance Magazine, Nov, 1998 by Manuel Schiffres

Aspect's CSM database gives clients, most of which are active in technology-related industries, access to about three million electronic and mechanical devices from nearly 1,000 suppliers worldwide. Analyst George Godfrey of the Raymond James brokerage estimates that the CSM software market will grow to $1.5 billion by 2002, up from $290 million in 1997. He estimates that Aspect had 70% of the market last year. Recently, the company introduced its Morocco database, which offers 1.5 million maintenance and repair parts from more than 3,000 suppliers and 125,000 office products from 1,300 vendors. Morocco may serve an even bigger market, says analyst Brent Wouters of brokerage firm Robinson-Humphrey. "Everybody needs to automate purchasing."

Sales and profits for Aspect, which was founded in 1990, have been growing at breakneck speed. Revenues, just $4 million in 1993, could approach $90 million in 1998. The company earned 7 cents per share in 1996, its first profitable year, and the consensus of analysts is for 42 cents per share in 1998 and long-term earnings growth of 51% per year. The stock is certainly not cheap, trading at 84 times 1998 estimates.

But Andrew Lanyi, a broker and analyst at CIBC Oppenheimer, compares Aspect to a work by Rembrandt, asserting that the stock is worth the money because the company has practically no competition. Moreover, says Lanyi, Aspect enjoys repeat business. "As long as you save people money, they come back every day." Finally, a company like Aspect could be counter-cyclical, meaning it would prosper in a recession because companies would be more motivated to trim costs.

Compared with AOL and Aspect, Sterling Commerce looks like bargain-basement material. Shares of the company (214-981-1100), which provides software and services to facilitate the electronic exchange of documents among businesses, trade at just 29 times estimated earnings of $1.26 per share for 1998. This isn't an unreasonable WE ratio for a company whose earnings are expected to compound at a 30% annual rate.

Sterling Commerce, which was spun off to the public in early 1996 by Sterling Software, is a major player in the burgeoning field of e-commerce. It operates a private network that businesses use for transmitting purchase orders, invoices and other sensitive documents. It also sells software that enables businesses to create electronic purchase orders, and that lets businesses exchange large files of data over both private networks and the Internet.

Businesses are willing to pay for Sterling's services (rather than use the Internet for transmitting important papers) because Sterling makes sure those papers get to their intended destinations. "They can monitor every document and make sure it's gotten to the right place at the right time," says T. Rowe Price analyst Hingorani.

The growth of the Internet also offers opportunities for Sterling. For example, Sterling performs electronic-fulfillment functions for Amazon.com, the Internet-based book retailer. "A huge shift of capital is under way from traditional commerce channels, such as bookstores and music stores, to the Internet," says Robert Loest, manager of the IPS Millennium fund. "Sterling provides the gateway through which all those sales flow, so it ought to do pretty well."