Analysts stick with Comverse, but cut target

Barclays is optimistic, but still cut its target price by 28%.

After a 31.8% drop in the share price of Comverse Technology Inc. (Pink Sheets: CMVT) on Friday to $4.90, following a warning about a cash crunch, which will lead to more layoffs and cost-cutting measures, leading investment houses responded by cutting their target prices for the company.

Barclays Capital reiterated its "Overweight" rating for Comverse, but cut its target price by 28% from $11 to $8, still 63% above Friday's close. JPMorgan also reiterated its "Neutral" rating, and cut its target price for Comverse from $9.50 to $8.50, 40% above Friday's close.

On Friday, in a letter to employees which was appended to a notice to the US Securities and Exchange Commission (SEC), Comverse CEO Andre Dahan warned of pending layoffs. The company reported partial figures for the first fiscal half of 2010, which ended in July, in which it pointed to a drop in its orders backlog. Dahan said, however, that he expected an improvement in orders in the second half of the year.

JPMorgan's analysts said that they had thought that the hardest parts of the restatement were done, but that Comverse's announcement on Friday caused them to reevaluate the share. The analysts noted Comverse's efforts to sell assets. The analysts based their new target price on a revenue multiple of 1.2 for 2011, and they believe that the company will disclose its working capital figures early in its 2011 fiscal year, and that "at the current run rate it is expected another couple of hundred million would be burned between and the April 2011 quarter."

Barclays Capital is encouraged by Comverse's efforts to solve its problems, including the hiring of Goldman Sachs to pursue strategic and liquidity options. Comverse estimates that its cost-cutting measures will save it $45 million, and it expects to have $100 million in cash at the end of April 2011. Barclays' analysts believe that management's efforts will not affect the company's core businesses. Their target price assumes a multiple of 0.8 on $750 million in sales in fiscal year 2011, compared with their previous estimate of a multiple of 1 on $816 million in sales.

Published by Globes [online], Israel business news - www.globes-online.com - on August 15, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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