UPDATE FROM LEHMAN BROS:
Headline: Telecom Equipment: Focus Names In Small Cap Telecom Equipment
Author: Tim Luke 1(212)526-4993
Company:
Country: COM CUS
Industry: TELECM
Today's Date : 11/14/97
* We believe recent market volatility may be creating some compelling
opportunities to acquire the shares of some of the smaller cap
telecommunications equipment companies under our coverage.
* We would highlight companies with strong near term visibility where revenue
and earnings may exceed consensus expectations for FY97 and FY98. We are
recommending NICE Systems & Comverse Technology as core companies in this
category.
* We also consider solid current business trends may enable ECI Telecom &
Gilat Satellite Networks to deliver some upside to our projections despite
investor focus on their emerging market exposure.
* With particular weakness being experienced by Israel related technology &
telecom companies, we would underline that all Israel based companies
highlighted export 90-95% of sales & benefit from any incremental depreciation
of the Shekel Vs US dollar.
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NICE Systems (NICEY, 1, 38 1/8): Expect Strong 4Q97 And Robust Trends For 1998
Following an impressive 3Q97 which beat street expectations for revenues and
earnings, we believe NICE Systems is on track for a robust 4Q97 with the
company currently experiencing strong sales momentum across its product lines.
We maintain further upside may be achievable in 1998 beyond our current
estimates of $105 million in revenue and $1.73 in earnings. With the company
growing at rates of over 50% YoY, we consider current multiple of 22x FY98
earnings of $1.73 appears compelling. NICE has limited Asian exposure with
approximately 5% of sales coming from this region with the US caller market
providing the principle growth engine. We continue to believe that following
the recent conclusion of a distribution agreement with call center giant
Lucent, NICE Systems may be able to attract additional distribution partners
in international markets over the next several months. We are reiterating our
view that NICE Systems remains an exciting investment vehicle within the
dynamic voice recording and CTI (Computer Telephony Integration) call center
marketplace and may represent a core small cap telecom equipment holding. Our
1 Buy rating and our 12 month price target range of $60-65 are based on the
shares achieving a multiple of 25x our initial 1999 estimate of $2.26.
Comverse Technology (CMVT,1,$36 5/8):Estimates May Rise When Merger Closes
With backlog at record levels of $82 million or more than one quarter and
visibility looking into 1998 remaining strong, we believe recent weakness in
Comverse's shares may be overdone. We expect Comverse to comfortably meet and
potentially exceed our estimates for 4Q97. In fact, we maintain that street
estimates may increase for FY98 and FY99 when Comverse formally closes its
pending merger with Boston Technology in around Mid-December this year.
We believe Comverse's acquisition of rival Boston Technology (BSN, NR, $38
1/8) significantly strengthens the company's strategic positioning as the
largest independent provider of enhanced services (such as voicemail) to
telephone service providers. We consider integration with Boston is
proceeding on track and is likely to create a powerful force in this fast
expanding global market. We expect Boston to report solid 3Q97 earnings in
line with consensus of $0.24 on November 18th.
We maintain that recent weakness may partially reflect investor concerns
regarding the combined company's exposure to Asian and Latin American markets.
While we acknowledge that the two companies do have a significant presence in
these regions and while we will continue to closely monitor Comverse and
Boston's momentum in this region, we note that in the most recent 3Q97 results
Asian sales represented about 14% of overall revenues split betweenapproximately 12 countries. We believe total sales to both Latin American and
ASEAN countries were less than 5% of sales in 1H97 for Comverse. With respect
to Boston Technology, where 60% of sales went to international markets 1996,
we would underline that around 42% of sales went to Japan where strong demand
from wireline and wireless service providers appears likely to continue.
Other Asian region sales including sales to China, where demand indications
remain robust, accounted for around 10% of CY96 revenues. While we will
continue to monitor Boston's exposure to Brazil which has accounted for around
10% of sales in 1H97, we do expect Boston to see improving momentum in Mexico.
Lastly, we note somewhat slower growth reported in 3Q97 from Comverse's
Information Systems division which is involved in recording for government
agencies such as the CIA and FBI, reflected delays in new wiretapping
legislation. We believe the growth from the IS division is likely to be
revitalized looking forward, as the long-delayed US government guidelines to
telcos on wire-tapping network upgrades are finalized. We also expect the
commercial recording business targeting the fast growing call center market to
become an increasingly significant percentage of IS sales. We are encouraged
that backlog for Information Systems increased to record levels in 3Q97 from
$42.6 to $47.3 million and note that the entire governmental recording
division will account for less than 5% of the new combined company's sales.
We believe Comverse Technology's core Network System's business is likely to
continue to benefit from expanding demand from wireline and wireless networks
around the world as service provider seek to add revenue generating enhanced
services such as voicemail and information services. Meanwhile, the
Information Systems division is well placed to exploit the transition from
analog to digital recording and monitoring systems by both government agencies
and corporations. Our price target range of $50 is based on our view that
investors are likely to focus on CMVT's earnings growth in excess of 35%
allowing the shares to achieve a multiple of approximately 25x our revised
1998 estimate of $1.95.
ECI Telecom (ECILF, 1, 27 1/8)
Following 3Q97 earnings which beat expectations, we continue to expect solid
growth trends from the key DCME, SDH and Telematics units. We believe DCME
may be positioned to see a further sequential increase in sales in 4Q97 with
more modest growth likely to continue in 1998. We expect the SDH unit to
record growth of over 30% in 1998 to around $145 million. While we have
modest expectations for Telematics, we do expect to see continued sequential
increases as this turnaround gains momentum. Improvements from this
previously loss making unit division would have an highly beneficial impact on
overall profitability. In the Acccess area, we expect new products and a
growing contribution from the Telegate cable/telephony investment to boost
growth rates.
While we will continue to monitor ECI's progress in restoring the Access
division to sequential growth as well as its exposure to Asian markets (19% of
3Q97sales) we expect revenues to expand approximately 19-20% in 1998 to around
$810-815 million. We will also monitor backlog levels which we expect to
increase in the seasonally stronger 4Q97 after moving slightly lower in 4Q97
to $181 million from $214 million in 3Q97. We consider,however, that the
shares are attractive at just 13x fowrad earnings. In our opinion, although
the shares may be subject to fluctuations reflecting the timing of large
individual orders, investors are likely over the next 12 months to focus on
ECI's potential to deliver revenue and earnings growth of approximately 20%
over next several years. Following higher than expected earnings in 3Q97, we
are raising our FY98 estimates to $2.05 from $2.00 partially reflecting the
improved gross margin outlook. Our price target of $38-40 and our 1-Buy
rating are based on ECI achieving a multiple of approximately 18x our fiscal
1998 EPS estimate of $2.05.
Gilat Satellite Networks (GILTF, 1, 29 1/8)
After strong 3Q97 earnings which revealed record backlog levels, with just 5%
f backlog in Asia, we believe Gilat is likely to continue to benefit from
strong growth in its core market of data oriented VSAT equipment as thecompany extends in market share as a price/performance leader. Additionally,
we consider that as a technology leader Gilat is well placed to exploit the
development of new VSAT applications notably in the areas of Internet access
and rural telephony. Based on Gilat's strong competitive position with
increasing visibility with a rising backlog, we believe the Company should
continue to enjoy revenue growths of approximately 25-30% over the next
several years. Our positive 1 Buy rating and twelve month our price target of
$45 reflect our view that over the next twelve months, investors are likely to
focus on Gilat's ability to deliver earnings growth of 25-30%, allowing the
shares to trade at a multiple of approximately 22x-23x our 1998 estimate of
$1.90.
Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities. |
