Listen to this article

Date: August 24, 1998

Title: STOCK TO WATCH: alphanet solutions

Author: By Rob Garver

Section: INVEST NEW JERSEY

AlphaNet Solutions (NASDAQ:ALPH) of Cedar Knolls is facing a couple of problems these days: plummeting share prices and a perceived inability to hold on to technical staff in a highly competitive information technology market. A 14-year-old reseller of computer equipment that has gradually moved into the service and support field, AlphaNet went public in March 1996. In November 1997 it was named by Forbes magazine to its list of the “200 Best Small Companies in America.”

Unfortunately for shareholders, things have been less pleasant lately. As of Thursday”s close, AlphaNet had fallen from a six-month high of $14 in early May to an all-time low of $5.27. AlphaNet pre-announced a poor second quarter earnings report in late July, blunting the reaction that would likely have occurred if there had been no warning that earnings would be 5¢ per share under analysts” consensus estimate of 17¢ earnings per share.

The bad news did not stop there. The second-quarter report also revealed that the company was entangled in a lawsuit with former vice president for technology services Bruce Flitcroft, whom it accuses, among other things, of soliciting company employees and revealing confidential company information.

According to analyst Paul Krieg of Legg Mason Wood Walker in Baltimore, AlphaNet has been attempting to reduce its exposure to the high-competition, low-margin computer reselling business in favor of a move to service and support. In the most recent two quarters, AlphaNet has seen its service and support sector produce more than 50% of its gross profits. “That is the attractive part of this business, but unfortunately, they”ve had a lot of staff turnover,” says Krieg.

“It”s a very tight labor market in information technology personnel right now, and because of that, there is a lot of competition for bodies and a lot of salary inflation,” Krieg says. He believes that AlphaNet”s compensation is in line with industry standards, but points out that in a survey of IT professionals, compensation ranks between third and fifth among the top reasons for leaving a job. “There are a lot of soft issues that employees look for–work environment, that sort of thing,” says Krieg, who admits that he has heard rumors that there is considerable employee discontent at AlphaNet. If there is discontent, it may be traceable to what the firm called “targeted headcount reductions” in June, which were aimed at increasing margins in the support sector.

The company”s share price had fallen to $6.75 at Tuesday”s close, and then on Wednesday it lost 20% of its remaining value on news that analyst Monish Bahl of Parker/Hunter in Pittsburgh had downgraded the stock from buy to hold. Bahl said Thursday that he did not expect the troubles at AlphaNet to last. “What I”m hearing is that there was forced attrition in June and afterward there was increased unforced attrition. I”m surmising that this is just a blip, not a long-term trend.” The company, he points out, does not have a history of being unable to retain staff.

Bahl sees good potential in AlphaNet for investors willing to hold the stock. “For value-oriented investors,” he writes, “we would continue to be patient and hold the stock, believing its current bargain-based valuation will have considerable upside once earnings growth stabilizes some time late next year.”