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Tickers in this Article: ORCL, MSFT, ADBE, SAP, TGT, IBM
Business intelligence is the process of gathering, sorting and reporting on actionable data. The problem lies in getting to the information from disparate systems in hopes of creating one version of the truth. Fortunately for software application providers, everyone from self-employed entrepreneurs to huge retail chains like Target (NYSE:TGT), along with domestic and foreign governments, must have the ability to gather information capable of creating a competitive advantage.

Let's take a look at how layoffs and rumors of layoffs affect the stock value of a short list of application software providers whose customers are tightening their financial belts.

Software Provider Layoffs
A slowdown in spending from retail and commercial customers led to a number of layoff announcements from software providers in January. IBM (NYSE:IBM) announced the need to lay off 2,800 employees primarily from its sales force in mid-January. In my region near the Research Triangle Park in North Carolina, 1,400 in the software group alone were affected. Oracle (Nasdaq:ORCL) reported 500 layoffs from its sales and consulting groups in the same month, while tech industry followers continue to speculate on whether a larger round of layoffs for the giant application software provider is just over the horizon. Microsoft (Nasdaq:MSFT) has also announced its intention to lay off up to 5,000 employees to cope with the current declines in software sales.

Valuation is difficult when recessionary forces like market volatility, large layoffs and stock market losses are at play, but value investors can gain insight into where the strength lies among application providers by using the price/earnings to growth (PEG) ratio. Value investors often use the PEG ratio to help in their search for an undervalued stock. A PEG ratio below "1" suggests a stock is undervalued by considering share price, earnings per share and the expected growth rate over the next three to five years. Oracle, Microsoft and Adobe Systems (Nasdaq:ADBE) each have PEG ratios below "1" at 0.92, 0.89 and 0.85, respectively. IBM's PEG of 1.01 and SAP's (NYSE:SAP) PEG of 1.14 are only slightly above the threshold that value investors may rely on.

Below "1" PEG Crowd
Oracle managed to close out 2008, the end of its fiscal second quarter, by increasing revenues 6% to $5.6 billion driven by an 8% increase in software revenue. Microsoft also increased top-line revenue but with a smaller 2% increase to $16.63 billion. Adobe may have faired the best by reporting record revenue of $915.3 million for Q4 2008. Adobe management cited solid expense management as one reason for the record revenue results.

Final Thoughts
Simply choosing to follow stocks with PEG ratios near or below "1" does not guarantee future stock appreciation, but it does give investors a good starting place to begin doing their homework.

To learn more about investing using the PEG ratio, be sure to check out How To Find P/E And PEG Ratios and PEG Ratio Nails Down Value Stocks.

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