REFILE-UPDATE 1-CS starts software sector with overweight

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July 11 (Reuters) - Credit Suisse started coverage of the U.S. software and services sector with an "overweight" rating, saying companies are turning to the software industry in tough times to reduce costs and improve efficiency.

Software plays a critical role in reducing costs and improving efficiency through automation or elimination of manual processes, Credit Suisse analyst P. Winslow wrote in a note to clients.

Winslow forecast software spending to grow at a compounded annual rate of 7.8 percent from 2007 through 2012, and said he expects software spending downturn to be shallower and the recovery to be quicker compared with other technology sectors.

Given the uncertain macroeconomic outlook, Winslow recommended that investors focus on software stocks exposed to security and virtualization, like Symantec Corp (SYMC.O: Quote, Profile, Research) and Citrix Systems Inc (CTXS.O: Quote, Profile, Research), as well as companies with highly recurring revenue streams, like Microsoft.

The analyst began coverage of Microsoft Corp (MSFT.O: Quote, Profile, Research) and Adobe Systems Inc (ADBE.O: Quote, Profile, Research) with an "outperform" rating, and Oracle Corp (ORCL.O: Quote, Profile, Research) and Salesforce.com Inc (CRM.N: Quote, Profile, Research) at "neutral."

Winslow has a price target of $35 on Microsoft stock.

Microsoft will eventually buy Yahoo's (YHOO.O: Quote, Profile, Research) search assets at least, as acquiring Yahoo represents the only way for it to effectively narrow the gap with Google Inc (GOOG.O: Quote, Profile, Research) in the Internet search market, he said.

On Adobe, Winslow said he sees robust revenue, operating profit, and free cash flow growth for the company, given its sustainable market leadership in the digital content creation business, and strong competitive positions in the rapidly growing mobile and Internet video markets.

He has price targets of $49 on Adobe stock, $71 on Salesforce.com and $24 on Oracle stock. (Reporting by Adheesha Sarkar in Bangalore; Editing by Deepak Kannan)