Sunday, May 08, 2011

Is Sapient's 15% Pop A Buy Signal?

Sapient (NASDAQ: SAPE) was a stock star in the 1990s that is among many former high-fliers that have suffered through a tough 11 years. But Friday, Sapient stock spiked 15% to a 52-week high. Does this mean that Sapient's former glory is about to be rekindled?

Back in the last 1990s, I spent some time with Sapient's then senior executive team to research my book, Net Profit: How To Invest and Compete in the Real World of Internet Business. Sapient was among the leaders in the Internet consulting business -- a service to companies seeking the most effective ways to build an e-commerce business. Sapient had a unique process for combining industry and technical expertise to help companies get online quickly and effectively.

The stock went up like a rocket between is April 1996 initial public offering and its August 1999 peak. During that time, Sapient shares rose from $8 to $70 -- growing at a compound annual growth rate of 83.5%. But then the stock slumped and it has spent the ensuing 11+ years below its IPO price. In 2006, Sapient's board tossed out its CEO and CFO in the wake of a stock options investigation that resulted in restating nearly a decade's worth of financial results.

Since 2006, Sapient's revenues have doubled and it has managed to earn a profit in all but one year. More specifically, Sapient reported 2010 revenues of $864 million, 105% higher than its 2006 revenues. And it earned $44 million in net income in 2010 -- an improvement over 2006's $1.4 million loss.

But Sapient's really good news happened in the first quarter of 2011. On May 5, Sapient reported $12.2 million in Q1 net income, up 98% from the previous year. And it made 9 cents a share, 80% more than in 2010.

Sapient also bested analysts' expectations. Its revenues of $249.9 million were $19.1 mil;lion above expectations and 30.4% higher than last year. And its earnings excluding special items of 12 cents a share were 71.4% higher than analysts expected.

Sapient is benefiting from positive trends. First, the Q1 U.S. GDP report revealed that corporate spending on technology was up 11.6% and some of that money is going to upgrade corporate web sites. Second, the weak dollar makes Sapient's value proposition more compelling in international markets.

But does Friday's 15% pop in Sapient's stock a signal that you should buy? To make that decision, you might consider using the price-to-earnings-to-growth (PEG) ratio that compares a stock‚Äôs market valuation to its forecasted earnings growth. By that measure, if a stock trades at a PEG of 1.0 or lower, it is reasonably priced. Higher than that, and it looks overvalued.

And based on a PEG of 1.2, Sapient stock is not overly expensive. It trades at a P/E of 43 and its EPS are forecast to grow 36.5% to $0.65 in 2012. It may not be too late to get into this stock because if it continues to beat expectations anywhere near as much as it did in the first quarter, the surprises for investors could be happy ones.


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