Tech Stocks Heading for the Rocks?

GOOD MORNING. Stocks in Asia closed mostly lower today; U.S. futures are pointing to a lower open.

Tech stocks have been the market’s darlings this year but are they about to drag it down? The Nasdaq has lost 3.4% since the markets peaked a week ago--more than the other major indexes. Many companies are still beating profit targets, but traders have come to expect better results. And tech stocks could get off to a rocky start today following an earnings miss and lower forecast by the German software giant SAP (SAP).

The world’s largest maker of business management software, SAP reported a 12% rise in third-quarter profits, missing estimates, and lowered its software and related services revenue outlook for 2009. Net profit in the July to September period rose to 435 million euros ($643.5 million), up from 388 euros million a year earlier, but missed forecasts of 443 million euros. Revenue fell 9.2% to 2.51 billion euros, also below estimates of 2.63 billion euros. And SAP lowered its revenue estimate for the year, saying it now expects software and related services revenue to drop between 6% and 8% versus an earlier forecast a 4%-6% decline. “While we are seeing signs of stabilization in the general environment, the market remains difficult,” chief financial officer Werner Brandt said in a statement.

The results may make traders skittish about tech stocks because SAP sells big-ticket software packages to corporate customers—clients that were supposed to be more insulated from the recession than cash-strapped consumers. SAP’s biggest rival, Oracle (ORCL), reported last month that sales slid 6.6% to $5 billion in its latest quarter, and analysts hoped SAP would indicate that corporate IT spending was bouncing back. But the company’s disappointing results and earnings forecast indicate that a rebound may not kick in until the first quarter of 2010, instead of later this year.

“Stock prices got overly excited about a recovery before we saw real evidence of it coming through,” says Rajeev Bahl, a tech analyst with Piper Jaffray in London. The markets are also looking for margin expansion, he adds, and SAP failed to deliver in that area. Traders took a dim view of the results too, sending SAP shares down over 7% in Frankfurt trading, their biggest decline since last October. SAP’s stock had been a winner this year, up 36%. But the stock now seems to have “overcooked the pace of recovery,” says Bahl.

IN OTHER NEWS:

Congress maybe a tough audience when it comes to reforming health care, but what about investors? The answer could come today, when several companies in the health insurance sector reporting earnings.

Among the firms under the microscope: Universal American (UAM), which primarily focuses on seniors. The company is particularly vulnerable to any changes to the Medicare Advantage program and government payments for this program are already set to decrease next year. Early flu-season medical costs will be a focus for the earnings release after the market closes today, and commentary about the company’s plans for next year will be key in the conference call Thursday morning, says Dave Shove, an analyst at BMO Capital Markets. Analysts expect the company to report earnings of 59 cents a share, down from 65 cents a share in the year-ago quarter, but revenue of $1.19 billion, 8.6% above last year’s results.

Aflac’s (AFL), which offers insurance designed to help insured people pay additional expenses, has a different set of issues. On one hand, the company is “likely to endure no matter what the outcome is” on health care reform, says Jeffrey Schuman, an analyst at Keefe, Bruyette, & Woods. But Aflac’s life insurance sales continue to suffer from weak demand. “Normally, in a recession, softer demand is offset by strong recruiting of sales agents,” Schuman says. But easier recruiting hasn’t compensated for weak demand in this case, he says. Analysts expect the company to report earnings of $1.20 per share, up from $1.02 per share in the year-ago quarter, and revenue of $4.68 billion, up strongly from last year.

Torchmark (TMK) also offers supplemental health coverage, including Medicare supplements, but they’ve been losing market share in that area, Schuman says. Torchmark appears to be benefiting more from strong recruiting than Aflac, so life insurance sales should be up 10% this quarter, he says. Analysts expect earnings of $1.49 a share, down slightly from the year-ago quarter, and revenue of $812.23 million, up 7.8% from the previous year.

Another issue to watch for both Aflac and Torchmark is the health of their investments, says Steven Schwartz, an analyst with Raymond James. Aflac is heavily invested in European banks, some of which have gotten state aid, while Torchmark’s portfolio leans toward US corporate bonds – both areas to watch when the companies report earnings after the market closes.