Saturday, July 29, 2000

Market volatility shakes Convergys

Stock rebounds after selloff

By Mike Boyer
The Cincinnati Enquirer

        Convergys Corp. is puzzled by the stock market's reaction to its second quarter results this week.

        Despite double-digit gains in revenues and earnings, which hit analyst expectations, the stock fell 16 percent Thursday, closing at $44 a share on a volume of 3.7 million shares, five times its normal volume.

        After the market closed, in response to a New York Stock Exchange inquiry, Convergys said it knew of no underlying business issues causing the sharp sell-off.

        Friday, Convergys shares recovered somewhat, closing at $45.50, up $1.75.

        Analysts said the sell-off was more a reflection on the skittishness of the market and investor expectations than any problem with the leading provider of billing and customer service to wireless telephone providers and other corporations.

        Convergys, spun off from the former Cincinnati Bell Inc. two years ago, prepares the bills for about 40 percent of the nation's 100 million cellular subscribers.

        “From my perspective, they had a solid quarter,” said Carla Cooper, analyst with Robert W. Baird & Co. “But it was a tough day in the market.”

        Technology stocks in general were hit. Shares of Nokia Corp., a leading wireless equipment provider, fell 20 percent, despite a 64 percent gain in second-quarter earnings, because it warned third-quarter results may be lower than expected.

        Ms. Cooper said Convergys, which has seen its stock price rise about 80 percent since January, has attracted aggressive institutional investors who expect their stocks to not just hit quarterly targets but exceed them.

        While Convergys' earnings of 29 cents a share were on target, a 22 percent growth in revenues was slightly below expectations. The company conceded that earnings from Ameritech Cellular, the partnership in which Convergys has a minority stake, were about $1 million less than expected.

        “They have no control over that, so I don't consider that part of their core earnings,” Ms. Cooper said. Core earnings from its billing and customer service business were 27 cents a share, about a penny more than she expected.

        Despite the company's strong performance, Ms. Cooper Friday cut her opinion on Convergys from a “strong buy” to “market outperform” and her price target from $56 to $50 a share.

        Steve Mygrant, director of equity analysis at Fifth Third Bank, said Convergys may be a victim of its own success.

        “Their earnings were strong, the company's well-managed and it is well-positioned in the markets it serves, but the stock got a little ahead of itself,” he said.

        Before Thursday's sell-off, Convergys was selling at more than $50 a share, hitting a peak of $55.121/2 earlier this month, but Mr. Mygrant said the stock would be more fairly valued in the mid-$40 a share range.


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