One of the perils of software stocks is the inevitable sales slowdown just before the company introduces the newest version of its keystone product. Cognos (symbol COGN), a world power in what's called "business intelligence software," hit a tailspin while it was finishing work on Cognos 8, which has been available since November. The stock, which returned 31% in 2003 and 44% in 2004, lost 21% last year.
Cognos 8, however, seems to be a catalyst for a turnaround. The shares have climbed 13% so far in 2006, to $39, and analysts are becoming more bullish. In December, Banc of America Securities gave Cognos a "buy." In January, RBC Capital Markets boosted its rating to "outperform." Two days ago, A.G. Edwards lifted its "sell" rating to "hold/speculative." That last one sounds like faint praise, but Edwards analyst Yun Kim says checks of Cognos's sales channels about the new program are highly encouraging. In addition, Kim notes, "the morale of the sales force continues to improve with the help of new sales incentives." That's what Cognos executives intended in January when they said in filings with the Securities and Exchange Commission that the company was taking steps to improve the performance of the sales force. The filings also indicated that management wanted salespeople to focus less on selling service contracts for older Cognos products and focus more on selling the new package, which is more lucrative.
Cognos 8 isn't easy to explain, though if you go to the company's Web site, www.cognos.com, there are real-world examples and tutorials. Basically, it enables a company to take all of its financial, sales and operating data and analyze whether the company is operating more or less efficiently. Cognos faces tough competition from the likes of Oracle and SAP and could someday butt heads with Microsoft, but it also has the advantage of specializing in this highly profitable niche.
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Based on Thomson First Call's average earnings estimate of $1.50 a share for the year ending in February 2007, Cognos trades at 26 times earnings. That's a reasonable price for this industry. Even allowing for the weak 2005, the stock has outgained shares of Oracle, SAP and Computer Associates over the past five years.
--Jeffrey R. Kosnett
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