JP Morgan is downgrading BMC Software (NYSE:BMC) to Underweight from Neutral:
We are downgrading the shares of BMC to Underweight from Neutral and establishing an end-December 2010 price target of $30, representing 20% downside from current levels (our end-2009 price target was $30, too). The stock appears to imply material improvement in operations, which we view as unlikely. At this point, we believe the risk to the shares outweigh the potential reward.
Great Expectations. While the BladeLogic assets are probably leveraged to improved enterprise software spending, we do not expect much change to the demand for the remaining assets of BMC from historical rates.
Historical Weak Free Cash Flow Likely to Persist. We expect the surprisingly weak long-term free cash flow characteristics of BMC to persist, even with the much anticipated mainframe software renewal cycle that is expected this year.
F10 Guidance Risk. While this is not a call on the quarter, we do believe BMC’s F10 guidance could be at risk since this is predicated on an improving software spending environment. Though non-GAAP EPS will likely at least come in line due to accounting flexibility, cash flow could be at risk (though BMC also enjoys flexibility in reporting operating cash flow).
Not Likely to Be Acquired. We recognize the risk of BMC being acquired but view that as unlikely at these levels or even meaningfully below these levels.
Action: JP Morgan is trying to spoil the bulls' party and I'd say they they will succeed, at least near-term. Comments about weak cash flow and F10 guidance will definitely hurt the stock.
Should be good for at least 3% of downside today. Even more if the market stays red.
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