SAP Overview

March 10th, 2005 - Copyright by Morris Rosenthal - - contact info

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Trading Notes

Copyright 2005 by Morris Rosenthal

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Notes on trading SAP stock for investing in my SEP

If you really want to make money with SAP, consulting in ERP makes more sense than buying their stock:-)

SAP AG is the German software giant that trades as an ADR on the NYSE. Like many foreign stocks traded on US exchanges, SAP ADR shares show very low institutional interest (10%), probably because they prefer to buy the actual shares on the DAX. SAP specializes in software for medium to large businesses, and is particularly known for enterprise reengineering solutions in the corporate world. Despite being a foreign company, SAP learned a few lessons from its U.S. counterparts, like not paying a dividend. It's currently using some of that retained earnings power to go shopping, and may get involved in a bidding war with arch competitor Oracle for Retek, which trades on the NASDAQ under the symbol, RETK. Retek makes provides software to retailers, a big niche market that either SAP or Oracle would like to prevent the other from dominating. SAP shares are trading at a few bucks above half of their peak valuation back around the millennium, when Y2K concerns were leading corporations willy-nilly into new software investments.

SAP reports their earnings in Euros, which I'm converting to dollars at the current value of around 1.35 dollars per euro. SAP's total revenue in 2004 was $10.1 billion, up 7% almost $9.5 billion in 2003. About 69% of SAP's revenue derived from software sales and maintenance in 2004, with the bulk of the remainder (26%) coming from consulting. SAP's R&D costs rose just 2% from 2003 to 2004, to a level of $1.4 billion, or under 14% of revenue. SAP shares earned $5.70 in 2004, up 22% from $4.68 in 2003. It looks to me like employee stock compensation only ate about 2% of operating income in 2004, down from 8% in 2003, probably due to options being out of the money now.

SAP trades at a P/E multiple of nearly 29 times, compared to around 24 times for Oracle. SAP market cap is around $51 billion, compared to $69 billion for Oracle. Shares have been trading up and down in about a 20% band around the current price for the past year. I'm more inclined to buy ORCL at the current levels, but I'll have to read up on them first.

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