Merrill Lynch has downgraded its recommendation for billing and CRM company Amdocs (NYSE: DOX) from "Buy" to "Neutral". Analysts Tal Liani and Gil Alper have cut their price target for the stock from $34 to $30.
Amdocs shares closed on Friday at $29.40, giving the company a market cap of $5.89 billion
"We are downgrading our rating to Neutral from Buy based a diminishing pipeline,margin risk,and Valuation," Liani and Alper write.
"We are reducing our target valuation multiple from 21X P/E to 18X P/E and reduce our F2006 pro-forma EPS estimates from $1.77 to $1.69, resulting in a lower theoretical fair value (12-months out) of $30, vs .$34 previously.
"We see limited downside risk to Amdocs’ business and highlight a robust business model, strong cash flow and major wins in N.America.
"But despite the positives, the stock,in our view, will be more impacted in the intermediate-term by the expected margin pressure and deteriorating growth outlook.
"We highlight the following 3 points in support of our downgrade: 3"1)Revenues in-line; margins under pressure. Recent and expected wins associated with US carrier consolidation imply low risk to our revenue estimates. These wins were less lucrative and more competitive than we had expected. We are lowering our operating margin forecast from 19.1%to 18.3% to reflect potential pricing pressure from the Sprint/Nextel deal.
"2)Pipeline is drying up. The big revenue opportunities have materialized (or are expected soon), and beyond next year’s benefits from carrier consolidation, we see limited growth potential of Amdocs’ backlog.
"3)Trading near its 52-wk high at 18x F2006E EPS, we believe there is limited upside potential to the stock from current levels."
Published by Globes [online], Israel business news - www.globes.co.il - on September 6, 2005