WHO ANALYZES THE ANALYSTS’ MOTIVES? BURNED FIRM WANTS IT TO BE THE SEC: FIRST THE DOWNGRADE, THEN RECORD EARNINGS

Compuware chairman and CEO Peter Karmanos is calling for the Securities and Exchange Commission to investigate the motives of brokerage-house stock analysts after his company’s stock was downgraded hours before reporting record quarterly earnings.

Mr. Karmanos is reacting to a downgrade in Compuware stock from analyst James Mendelson at tech-stock research specialists SoundView Technology Group Inc. in Stamford, Conn.

According to reports on Internet business wires, on Oct. 18, Mr. Mendelson lowered his Compuware rating from “buy” to “hold” based on concerns that Compuware was primarily known as a Y2K-bug consultant, and would have to do a lot of work and spending to reposition itself in electronic commerce.

There’s only one problem: Compuware is not and has never been primarily a Y2K shop.

Compuware stock tanked 11% immediately following Mr. Mendelson’s downgrade. After the close of trading that day, Compuware then announced a banner quarter: net income up 32% to $92 million on a 55% increase in revenue, to $568 million.

Among components of revenue, professional-services fees grew 67%, software license fees rose 57% and maintenance fees rose 29%.

“This analyst (Mr. Mendelson) never talked to anybody at our company (before the downgrade),” Mr. Karmanos said during a conference call with analysts.

Mr. Karmanos believes some analysts “are simply shilling for short positions.” It’s not uncommon, he says, for a negative report on Compuware to come out two to three days after an increase in short positions on the company’s stock.

“I think this is a real flaw in investing today, and the SEC really ought to take a look at this,” he says.

Mr. Mendelson did not respond to telephone messages left at SoundView the week he downgraded the stock. Mr. Karmanos declined to comment on the events.

But in the conference call, Mr. Karmanos was clearly annoyed about both Mr. Mendelson’s downgrade and the “sheer nonsense that appears in (Internet) chat rooms.”

“We are trading at a discount to our growth rate that is the greatest in the industry at this point, and yet there are still those people who want to worry about our numbers,” he says.

Don’t break out the sad-song violins for Mr. Karmanos, however: The day after announcing the banner quarter, Compuware’s stock rocketed 21%.

About the only flaw in the quarter was a relatively low 9% profit margin on professional services, because the company continued to staff up this department in anticipation of demand for electronic-commerce services. The company says that its head count in this area grew to 10,653 from 5,708 a year earlier.

Mr. Karmanos told analysts that Compuware brought in more than $100 million in revenues in the quarter from e-commerce, calling that “$20 million more than Y2K revenue in the peak quarter we had for that service.”

Other analysts, who almost universally retain “buy” ratings on the stock, praised the performance.

“The earnings looked fine — I have no problems with the company,” says John Puricelli of St. Louis brokers A.G. Edwards & Sons Inc.

Paul Dravis, of the San Francisco office of Bank of America Securities, says Compuware “had very strong numbers, particularly on the software side. I think they’re still transitioning the professional services side from Y2K to e-commerce, but I think that activity is well-understood by most of the investment community.”

Crain News Service