Another Problem: ‘Y2K’ Will Pass
The year 2000 is more than 19 months away, but its approach is already taking a toll on some highflying computer-consulting stocks involved in solving the “Y2K” problem.
In the last month, shares of so-called information-technology companies--IT for short--have tumbled on fears that their currently robust Y2K business will evaporate as the millennium nears.
What’s the Y2K problem? Many computers aren’t programmed to recognize the year 2000. They will see it as the year 1900 instead--potentially causing massive systems problems. That has forced companies to hire armies of consultants to reprogram their computers.
In particular, Y2K work now makes up a big chunk of sales at Computer Horizons, Information Management Resources and Keane, analysts say. The fear lately is that revenue will trail off as the problems are fixed and Y2K expertise is no longer in demand.
“The gut issue, and everybody knows this, is that in 1999, 40% or more of Keane’s business will be Y2K-related,” said Vincent Turzo, a Jefferies & Co. analyst. “How do you make that graceful transition [to other work] without a hiccup?”
Not surprisingly, the companies are trying to branch out. Keane, for example, recently bought two IT firms that don’t focus on Y2K.
Some IT companies also have suffered because of U.S. immigration policies. IT companies often have plenty of customers but can’t find enough technology experts in the United States. As a result, they use temporary H1-B visas to bring over foreign consultants.
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The problem is that federal law allows only 65,000 new H1-B visas each year. With acute demand for workers, the limit has already kicked into effect this year. That means no more visas can be issued until the start of the government’s new fiscal year in October.
There are proposals to increase the limit but that doesn’t appear to be imminent. Lacking enough qualified workers, obviously, could put a crimp in IT companies’ profit growth.
About 85% of Mastech’s workers hold H1-B visas, according to Thomas Browne Jr., a Prudential Securities analyst. The figure is 75% at Intelligroup, 63% at Syntel, 53% at Information Management Resources and 33% at Complete Business Solutions.
To be sure, IT stocks are suffering in part because they had explosive runs through much of the last year and were trading at towering price-to-earnings ratios. For some of the stocks, P/Es have been cut from the 70-to-80 range to 50 or less.
Yet the short-term earnings growth outlook for IT companies remains bright, which is more than can be said for many U.S. companies in other industries. And the ever shifting nature of technology means consultants will always be needed.
But investors might have to endure repeated roller-coaster rides. The stocks’ recent plunge shows how quickly sentiment can turn at the mere thought of slowing earnings growth.
At this point, Jefferies’ Turzo recommends Analysts International while Browne likes American Management Systems and Affiliated Computer Services.
Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com.
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It Happense
After soaring through most of the year, information technology stocks have taken a beating lately on worries about the eventual phaseout of year 2000 business and continuing limits on the number of foreign IT workers that may enter the United States.
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Ticker Wed. Drop from Stock symbol close 52-wk. high Complete Bus. Solutions CBSL $25.75 --41% Info. Mgt. Resources IMRS 25.25 --40 Syntel SYNT 25.00 --37 Computer Horizons CHRZ 37.63 --30 Intelligroup ITIG 18.75 --28 Cotelligent CGZ 22.00 --26 Mastech MAST 23.00 --24 Analysts International ANLY 28.31 --22 Keane KEA 46.75 --21 Ciber CBR 29.69 --21 Sapient SAPE 45.63 --21 Affil. Computer Svcs. AFA 34.00 --9 American Mgt. Systems AMSY 29.44 --2
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Source: Times research
