Earlier this week, Pointer Telocation Systems Ltd. (Nasdaq:PNTR; TASE:PNTR) announced that three reputable international finance entities had participated in a private placement it held through the underwriter CE Unterberg Towbin, which raised $8.5 million.
The three institutions are Lehman Brothers Inc. (NYSE:LEH), Fort Mason Capital LLC, and Portside Growth and Opportunity Fund. Lehman Brothers we all know. Fort Mason Capital is an investment group which was founded by Dan German, founder of Blackhawk LP, an equities and foreign currency investment company. Portside Growth is an affiliate of Ramius Capital Group LLC, which was founded by Peter Cohen. These three prestigious financial groups have invested in Pointer of all companies, and according to Lehman Brothers director Eric Salzman and Portside director Marshall Jensen they entered Pointer after "evaluating its business model, its market presence as well as management's ability to deliver on its growth strategy."
There is no shortage of options for investment in this particular field. What the three investment groups apparently saw in Pointer was a small company that has signaled its desire to grow in this very competitive market, and that is not an easy task. In order to achieve outstanding success (otherwise the whole business will be of no interest to investors), substantial finance is needed, something that small companies have difficulty raising because the chances of success are low. The most important thing of all (which also affects the ability to raise finance), is the ability to implement a strategic business plan that will enable investors to see the light at the end of the investment tunnel, i.e. profit. Put differently, a serious investor won't touch Pointer's stock unless he believes that the company's current management is capable of implementing a successful business plan.
Pointer's stock so far has not given any indication that the market believes in the company's success, although it now appears that the company's chairman Yossi Ben Shalom, a man with a background in business and finance, is leading the company in the right direction. By November 2006, the stock had dropped to $5.20, 90% down on its January 2004 high. But then the company published its report for the third quarter of the year, and the stock rocketed in two weeks from $5.20 to $25. I wrote back then that the enthusiasm was exaggerated, but I added that what had happened was that many investors had begun to appreciate the work done by Ben Shalom and Danny Stern, whom Ben Shalom brought in as CEO in 2005. The stock now appears to have settled down at $10-11. The new investors purchased 805,000 shares at $10.50 a share, and on every two shares received an option exercisable within five years at a strike price of $12.60, a 20% premium.
In the meantime, Pointer has acquired Cellocator Ltd., an Israeli company specializing in cellular location-based services and technology, which has annual revenue of $15 million, and an Argentinean provider of vehicle retrieval and towing services, which has 1.8 million subscribers and annual revenue of $18 million. Pointer will spend a total of $27.50 million on these two acquisitions, part of which will come from the private placement, with the rest paid through a stock swap. Ben Shalom and his associates also made a right move when they made the placement conditional on the participation by serious investors, a move that will be extremely beneficial in the future.
The entry by investors of this caliber often says more about a company's prospects than anything else, and in this case it looks to me that the advent of these three investment groups ought to generate some interest (especially given that for them the amount invested is not significant). It is worth remembering that in 1998 or 1999, several US funds, among them the famous Franklin Templeton, invested in M-Systems, at a price of $4 a share. Back then no one wanted to invest in a stock that had been unwanted on Wall Street for seven years. I wrote at the time that the entry by these funds was an event that demanded attention, especially given the small sums that were invested. By 2000, M-Systems had climbed to $90. We probably won't see such a sharp jump within a similar time in the case of Pointer, but should the company be successful, the return will be huge.
Wait and see on ECI
This week I received a review by RBC Capital Markets analyst on Daniel Meron on ECI Telecom Ltd. (Nasdaq: ECIL). Meron downgraded the veteran company to "Sector Perform" from "Outperform." I'll come back to Meron's rating in a moment, but first a few words about the company and its stock. ECI joined the other tech stocks in the recovery that started at the end of 2002, staging an admirable rally from $1.25 in October 2002, to $9 in January 2004. Save for a short wave of excitement in the second quarter of 2006, following excellent quarterly results and expectations of more to follow that sent the stock up to $11.45, it has held steady for the last four years at $8-9. It turns out that this stock, which has probably not given its investors much cause for joy, has fared better over the last five years than other companies in the telecommunications infrastructure sector such as Alcatel-Lucent (NYSE: ALU), and Nortel Networks (NYSE; TSX: NT).
In his update on the company Meron says that for now he prefers to sit on the sidelines and not enter the stock, while he "waits for fundamental triggers to emerge." In ordinary language what he is saying is that the company's position is neither good nor bad.
ECI's optical equipment division, which accounts for 61% of sales, is the only unit which is presently growing, but it is not enough to lift the company into double digit growth. Laurel, the acquisition that the company made last year and Veraz Networks Inc. (Nasdaq:VRAZ), still do not amount to a growth factor. A lot will depend on broadband orders from Deutsche Telekom AG (NYSE: DT ), but nothing is moving here for the time being.
Meron has given ECI a target price of $9, a figure that matches his current sentiment about the company. Veraz had an extremely negative effect on ECI on Wall Street, due to the initial high expectations of the company. This will change if Veraz starts posting profits. I feel that investors find the range of divisions within ECI a bit off-putting, since they want to see more focus. That said, it should be remembered that whatever is holding back growth at present could turn into a major growth engine in the not-too-distant future. So Meron's conclusion is the right one for now - wait on the sidelines.
Published by Globes [online], Israel business news - www.globes.co.il - on April 18, 2007
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