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Technology Stocks : Comverse Technology -- Ignore unavailable to you. Want to Upgrade?

To: Mark Ambrose who wrote (1068)	3/8/2000 3:28:00 PM
From: Mark Ambrose	Read Replies (1) \| Respond to of 1331

CMVT's Bullish Earnings Report - from "The Individual Investor" individualinvestor.com ------------------------------------------------------------ Comverse Tech?s Bullish Earnings Report Senior Analyst: Garrett Bekker (3/8/00) Comverse Technology (NASDAQ: CMVT - Quotes, News, Boards) a former ?Hot Stock? Stock of the Day recommendation, soundly beat earnings estimates and announced a two-for-one stock split after the close of trading on Tuesday. Shares are up $1.25 to $223.34 in early afternoon trading and Comverse is up 143% since our initial recommendation on September 8 at $92.00. Reuters reported this morning that U.S. Bancorp/Piper Jaffray raised its price target for Comverse to $289. Lehman Brothers followed suit with a $280 target, while Dain Rauscher has a price target of $300. Jeffries & Co., however, downgraded Comverse. What?s an individual investor to do? For some answers let?s first look at some highlights of the quarterly results: For the quarter, Comverse generated $240.6 million in revenue, beating consensus forecasts of $226.8 million by 6.1%. Sequential revenue growth continued to accelerate, rising to 8.5% from 5.9% last quarter and 4.4% in the second quarter. On the bottom line, earnings per share came in at $0.60, compared to consensus expectations from I/B/E/S of $0.57, a 5.3% surprise. This is a slight decline from last quarter?s 5.7% earnings surprise, although Goldman Sachs noted that this was the third consecutive quarter in which Comverse exceeded expectations. Other highlights of the quarter: Year-end order backlog grew to $225.5 million. Goldman pointed out that order backlog has grown faster than sales for the fourth consecutive quarter, which could indicate that further upside surprises are in store. Ten new customers were added, bringing the total to 320. On a sequential basis, gross margin edged up 10 basis points and SG&A declined slightly as a percentage of revenue. As a result, operating margins and net profit margins continued to expand, reaching 20.3% and 21.0%, respectively. So what are we to make to the divergence of analysts? opinions on Comverse?s current valuation? Investors should note that Jeffries? downgrade was not based on concern about the company?s underlying fundamentals. The reduced rating was based solely on valuation concerns, noting that the stock is up 84% since the end of the third quarter and 53% so far this year. On an earnings basis, Comverse certainly isn?t cheap. Current consensus earnings forecasts call for Comverse to earn $2.55 for fiscal 2000 (year ended January 2001). However, estimates from Piper, Dain Rauscher and Goldman have come in at $2.64, so we expect the consensus number to rise shortly. Based on the revised earnings estimates and a mid-day trading price of $223.34, Comverse is trading at a P/E of 84.6. For fiscal 2001, new estimates average $3.18, which translates into a P/E of 69.4. On a price-to-revenue basis, Comverse?s valuation looks a bit more reasonable. The target from Piper is based on a 2001 revenue multiple of 19 times, while Dain Rauscher?s target uses a multiple of 20. Given that revenue grew 25.3% last year and is forecast to grow roughly 24% over the next two years, a revenue multiple of 20 doesn?t seem to be out of the question. Peter Leppik of Dain Rauscher Wessels notes that in addition to the strong momentum in revenue growth and order backlog, Comverse is benefiting from exposure to the red-hot wireless telecom market and also anticipation of its IPO of subsidiary Ulticom. Given the excitement that surrounded 3Com?s (NASDAQ: COMS - Quotes, News, Boards) spin-out of Palm, this alone could keep Comverse buoyant over the near term. Bottom Line: Although it?s certainly not a value stock at these levels, we think another strong quarterly earnings performance provides good reason to like Comverse over the long haul.