Telecoms -- and Investors -- Are Calling on Comverse
By Gene Marcial
Land mines abound in the tough technology market, and the fear among investors is that the tech zone may remain unapproachable for quite a while longer. Still, some pros insist that a handful of tech stocks deserve investor attention now and should be bought despite this rough market.
One such stock: Comverse Technology (CMVT ), a major global provider to telecom carriers of software-hardware platforms that enable them to offer enhanced services, including voice-mail, short text messaging, and prepaid phone services, as well as wireless Internet services. More than 330 wireless and wireline network operators use Comverse's "enhanced service platforms" in more than 90 countries. Among its customers are 14 of the largest phone companies in the world, including AT&T, Deutsche Telecom, Telecom Italia, and Verizon.
The stock didn't escape the market's tech-wreck debacle: Trading at more than 124 on Jan. 24, it crashed to a low of 44 by June 4. Shares have since rallied to 63, after the company posted better-than-expected first-quarter results. Revenues totaled $265 million -- some $9 million above some analysts' estimates -- and earnings jumped 40%, to 43 cents a share. More important, Comverse raised its guidance for its 2001 revenue and earnings, and maintained its numbers for 2002 -- an unusual event in today's tech world.
"STOCK OF CHOICE."
"Comverse is in a very good position to participate in the strong growth in wireless ehanced services for the telecom carriers," says Hilary Kramer, investment strategist and senior managing director at the multibillion dollar investment firm Cisneros group. "Comverse," she adds, "is our stock of choice in that fast-growing space."
David Raezer, an analyst at Morgan Stanley Dean Witter, is also high on this company. "We are maintaining our strong-buy rating on Comverse and our 12-month price target of 100 a share," he says. As the investment community gains comfort with the 2001 estimates and starts looking forward to 2002, "the stock should move toward our price target," says the analyst.
His 100-a-share price target is based on 47 times his 2002 estimate of $2.12 a share -- a modest premium, he says, to his three-year growth rate estimate of 35% to 40%. For 2001, Raezer expects earnings of $1.79 a share, up from 2000's $1.49.
"POWER OF INCUMBENCY."
What's the difference between Comverse and most other tech companies? Several things: Its capacity-based pricing model enables Comverse's revenues to grow as messaging traffic volumes increase. And, adds Raezer, the company has an attractive customer base, which includes first-tier wireless operators. "They face little risk from a financing perspective," he argues. Comverse's "power of incumbency" at these leading carriers gives it an advantage as they look to add new services, especially for the wireless Internet.
Moreover, Comverse's business should be able to buck the trend of slowing subscriber additions, says Raezer. It benefits from growth in wireless Net sevices such as short messaging, which accounts for less than 25% of messaging revenues but is increasing at a 100% rate, says Raezer.
What catalyst might cause the stock to shoot higher? Revenue growth could reaccelerate next year, figures Raezer. Comverse's revenue growth, he calculates, could go from 25% to 30% in 2000, and to 30% to 35% in 2002.
Peter Friedland of the San Francisco investment firm WR Hambrecht thinks Comverse is still very inexpensive. With the stock trading at about 37 times estimated earnings 2001 earnings of $1.78, "we believe Comverse's current valuation is compelling," says Friedland. He notes that the company has shown consistent growth at its core voice-mail business. And Comverse, he adds, has a strong track record of meeting -- or exceeding -- its financial guidance, says Freidland.
He believes Comverse will increasingly be viewed as an "attractive way to play the rollout of wireless Internet services." As its customers load more and more subscribers onto its voice-mail platform -- and as those subscribers actively use the services more -- the telecoms must buy additional capacity from Comverse, which typically occurs every four to six months.
Friedland expects at least a 15% to 20% increase in global wireless subscriber growth in 2001. With global penetration at just 12%, "there remains ample room for continued wireless subscriber growth for the forseeable future," says the Hambrecht analyst.
The message from Comverse seems clear: Visibility is high on its future earnings stream. No wonder that only 1 of the 20 analysts who follow Comverse has a neutral rating on the stock. The rest of the recommendations range from a buy, to market outperform, to strong buy. The tech sector may not be one giant boobytrap after all.
Marcial is BusinessWeek's Inside Wall Street columnist