Investor: One of the key planks supporting the current equity bull market is the ongoing strength of corporate earnings growth. This is particularly true for the all-important US equity market, where expectations regarding first-quarter growth in 2006 have been revised up to 10 per cent. If earnings growth for the most recent quarter does turn out to be 10 per cent or more, it will be the 11th consecutive quarter of double-digit percentage gains.
This has only happened once before in the US market, where there were 13 consecutive quarters of double-digit earnings growth from 1992 to 1995.
Despite this sustained period of profits growth and share price appreciation, many important stock market indices have still not reclaimed their highs of 2000. For example, the S&P 500 is still approximately 14 per cent below its peak, while the FTSE 300 is 18 per cent below its peak.
However, several equity indices that have a low weighting in technology and telecoms have surpassed their previous peaks over the past 12 months. This is true for many small and mid-capitalisation indices in the US and Europe.
For example, the mid-cap FTSE 250 index is edging close to breaking through the 10,000 barrier for the first time, after finishing last week at a record 9,950.
Many of those smaller country stock markets, where the technology sector weighting has always been low, have also hit new highs.
This is true for the Irish market, where the Iseq overall index is now trading well above its 2001 peak.
The technology and telecom sector weighting of the Iseq continues to be very small. If the Babcock & Brown takeover of Eircom succeeds, this weighting is set to become even smaller, consisting of just a few small technology stocks.
One of these is Iona Technologies, one of the survivors of the dotcom boom. Iona has been one of the "walking wounded" for quite some time as it continues to struggle to achieve meaningful profitability. Fortunately, the company went into the dotcom crash with substantial cash balances that have enabled it to engage in several restructurings.
Iona has recently reported a set of first-quarter 2006 earnings numbers that beat market expectations. Quarterly revenues of $16.9 million (€13.6 million ) were 3.4 per cent higher than a year ago.
Total quarterly expenses were $16.1 million, which allowed Iona to report positive earnings per share of two cents for the first quarter of 2006 - better than brokers' forecasts of break even.
Iona's key products and services remain the delivery of software and services that enable companies to integrate heterogeneous computer systems.
Iona was a pioneer in the development and delivery of such systems and, as a result, it boasts an impressive client list of more than 4,500 blue-chip companies worldwide. A key problem for Iona is the absence of significant barriers to entry, which means that it has to innovate constantly to maintain and grow its market position. Another weakness is that some of its key competitors include large integrated companies such as IBM and BEA Systems, which have deep pockets and which can offer bundled hardware and software solutions.
A key challenge for Iona is to continue to build relationships with other systems integrators and independent software and hardware vendors if it is to achieve its long-term objective of transforming itself into a $200 million a year revenue company.
This compares with current annual revenues of approximately $70 million. Iona's share price performance in recent years has reflected its struggle for survival and has languished in the doldrums. It has, however, recently broken out of a long trading range of around $3 to move up to $4.5.
Despite the improved trading performance, Investor's view is that the stock has quite limited upside. It is difficult to see the company becoming highly profitable in such a competitive marketplace. The best hope for further share price appreciation lies in merger and acquisition activity.
Iona has a strong balance sheet with $53 million in cash, which equates to $1.47 per share, and its niche market position could be of interest to a larger company. However, a takeover of Iona is merely speculation. As such, until there is evidence of meaningful and sustained profitability, the shares may struggle to maintain current levels.
