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SAP AG (SAP) reported lower than expected revenues and earnings in third quarter of 2008 due to the economic downturn and costs of its Business Objects (BOBJ) acquisition.
The company posted modest growth in Asia, Americas and Europe. The financial crisis, which accelerated at the end of the third quarter, impacted SAP's business in all regions with an unprecedented sharp downturn in business activity. Moreover, the willingness to look for larger acquisitions to help fuel its growth, compared to its previous organic growth strategy is likely to hinder the company's stock performance in the near term.
We continue to rate shares of SAP a Hold, however, as we believe that the company has the resilience to ride through this downturn, although we believe shares are in-line with our current valuation of the company. We have fixed our target price at $35.75 based on the company selling at 16.32x our 2008 EPADS estimate of $2.19 over the next six months.
If SAP continues to move forward with an acquisition growth strategy, its P/E may come close to resembling that of Microsoft Corporation (MSFT) or Oracle Corporation (ORCL), although on a price/sales basis, SAP is valued lower than these companies. Until the company can show it has the ability to integrate the BOBJ acquisition, its shares will continue to be under pressure.
Udayan Mukherjee contributed to the report.
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