SAP's Sticky Situation

Wedbush Morgan says the macroeconomic slump crimps upside for the stock.
SAP (SAP: NYSE) By Wedbush Morgan Securities ($36.27, Jan. 29, 2009)
WE REMAIN NEUTRAL REGARDING SAP (ticker: SAP) shares as we believe that the global recessionary environment could continue to weigh on the company's software sales over the next few quarters.
Despite SAP shares trading below their historical average lows, we believe they might not appreciate meaningfully until the macroeconomic environment begins to stabilize. Additionally, marginally better-than-expected fourth-quarter 2008 results and 2009 operating margin guidance could limit downside risk, but are not enough to cause the shares to appreciate meaningfully over the next few quarters, in our view.
Structured Query Language Server Reporting Services (SSRS) guidance of flat to minus-1% implies new software license sales could decline 12%-15%, according to our estimates. Until license sales begin to grow again, we do not believe investors will get excited about an "earnings growth through cost cuts" story.
SAP's fourth-quarter revenue was weak, in our view, but mostly in line with lowered estimates, with earnings per share above expectations stemming from significant cost cuts. SAP announced an additional 3,000 employee global-headcount-reduction plan expected to save 300 million to 350 million euros per year, and did not provide license sales guidance for 2009.
The stronger U.S. dollar did not provide a significant fourth-quarter tailwind, leading us to believe most of SAP's America's sales occurred late in December. Further evidence of a very back-end loaded quarter was the increase in days sales outstanding (DSO) and weaker-than-expected operating cash flow.
Fourth-quarter operating cash flow was much lower than expected. If the weak global economy claims enterprises as casualties via closures/bankruptcies, cash-flow issues could materialize for those large-cap software companies that extend credit to generate sales.
Fourth-quarter revenue was in line with, and EPS was significantly higher than, our and consensus expectations. Fourth-quarter revenue of 3.49 billion euros was in line with our 3.44 billion euros estimate and the consensus estimate of 3.54 billion euros. Fourth-quarter EPS of 72 euro cents was higher than our estimate of 67 euro cents and the consensus estimate of 70 euro cents. SSRS revenue of 2.67 billion euros was in line with our estimate of 2.65 billion euros and the consensus estimate of 2.67 billion euros.
We are lowering our 2009 revenue and EPS estimates to 11.8 billion euros and 1.68 euros from 12.3 billion euros and 1.94 euros, respectively, due to the continued challenging global selling environment; introducing 2010 revenue and EPS estimates of 12.4 billion euros and 1.93 euros.
We reiterate our Hold rating and lower our ordinary share target to 25.00 euros from 25.25 euros. Our new target reflects about 15 times multiple (previously about 13 times) on our 2009 generally accepted accounting principles EPS estimate. We believe that this multiple is in line with large-cap technology peers, and is appropriate at the low end of the stock's historic range, and also takes into account the global economic slowdown.