After microchip and software gorillas Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) failed to rescue the Nasdaq 100 with their quarterly results, maybe Internet communications gorilla Cisco (Nasdaq: CSCO) will do the trick this week. With 24% of its $87 billion company worth in cash reserves, amounting to $21 billion, a profit multiple of 22 for the coming year, and a sales multiple of three (excluding cash), the Cisco share could give investors a double-digit percentage yield the moment the company announces it is back on the growth track.
Another company that closed its quarter a week ago was Marvell Technology (Nasdaq: MRVL), which I have in my portfolio. The share has lost two thirds of its value in the past quarter, although it announced no fall-off in business, and will probably exceed the analysts’ forecasts when it publishes its results on August 22. Salomon Smith Barney analyst Clark Westmont explained in his review last Friday why the rumors that have pushed the share down in recent months are groundless. At the same time, however, Westmont himself lowered the boom on the share price by downgrading the share from “Buy” to “Market outperformer” and lowering his target price from $42 to $22. Westmont’s scalpel sliced the share price by over 17% on Friday, but bargain hunters quickly bought the share at the bottom, and it closed down 10% on a huge $150 million turnover, three times its average.
Westmont explained he lowered his recommendation because he was concerned that profit margins on Marvell’s two growth engines, storage chips and Gigabit Ethernet will be eroded more rapidly in the long term than he thought. He lowered his recommendation, even though he is sure the company will not only beat the forecasts for the quarter just completed, but will raise its forecasts for the following quarter. Furthermore, Westmont writes apologetically that Marvell is the only company growing at a rapid pace, in contrast with all the other chip companies – 54% in the quarter ending in April 2002, after the merger with Galileo, compared with the corresponding quarter in 2001. In its current mood, however, Westmont believes the market is ignoring this and is concentrating solely on negatives aspects (which are not clear to me), and that’s why he lowered his recommendation.
Westmont added that if the climate changes, the Marvell share will respond quickly. He based his target price on a multiple of 30, although he himself said that the company would grow 60% next year. To my way of thinking, his review seems odd and opaque; furthermore, it totally ignores the renewed growth momentum in Galileo, Marvell’s Israeli section. It’s the kind of review that makes you wonder if the analyst knows something negative that we don’t, which he can’t write about, but about which he wants to give the first hint, such as the loss of a key customer. It could also be a case like Check Point (Nasdaq: CHKP), in which the analysts lowered their recommendations just in case something went wrong. The investors who sold their Check Point shares have paid a 60% penalty for it – the subsequent rise in the share from the bottom after the negative recommendations were published. I expect events to follow this script with Marvell, too.
Check Point rose slightly this week, even though the Nasdaq 100 fell by almost 2%. The share’s relative strength in recent days may be due to an announcement by IBM Germany on Friday after the beginning of trading that it has begun selling Check Point’s VPN and security software on its xSeries enterprise server platforms, through the Tech Data (Nasdaq: TECD) marketing company. The announcement can also be interpreted as the beginning of cooperation that will expand beyond Germany.
Something interesting happened this week to SonicWALL (Nasdaq: SNWL) a Check Point competitor, which I hold in my portfolio. You may remember that SonicWALL announced several months ago that it was going to walk all over Check Point in the high-end larger enterprise market. Not to be outdone, Check Point gave notice that it was entering SonicWALL’s market with its subsidiary’s S-Box solution. Last week, SonicWALL president and CEO Cosmo Santullo, who was recruited for the express purpose of the company’s entry into the large enterprise field, unexpectedly announced he was resigning for personal reasons. The analysts call this his capitulation, and expect SonicWALL to focus on preserving its small enterprise market against encroachments by Check Point and others.
SonicWALL is currently traded at a value of $283 million. The company has $233 million in cash and no debts. Now that the company’s CEO has left, this is a golden opportunity for Check Point to immediately gain annual sales of over $100 million in a field with the most growth potential of any security sector. The only reason I’m still holding onto bruised and battered SonicWALL is that I’m convinced that if Check Point doesn’t take over the company, one of its competitors will, sooner or later.
NICE-Systems (Nasdaq: NICE) and href=http://www.radware.com target=new>Radware(Nasdaq:RDWR) published better than expected results last week, joining other companies like Check Point, for whom the analysts’ doomsday prophecies failed to come true. Radware management volunteered no new information to convince the investors that the company is on the brink of a major sales breakthrough, so the company is still trading at $1 above its cash reserves, with trade volumes unaccountably reviving on occasion.
NICE vividly remembers its shock two years ago, when Comverse(Nasdaq:CMVT) snatched away Loronix Information Systems from under its nose. Loronix, which NICE had marked for acquisition to complete its NiceVision product line, is today part of Verint Systems (Nasdaq: VRNT). NICE thereupon hurried to acquire Thales, Loronix’s British competitor in the field of multimedia recordings for customer contact centers. This acquisition will trouble the NICE share price for a long time. It will have to prove to the investors that it is an exception to the rule that most acquisitions fail because of problems in integrating two completely different management cultures. They can consult former Ministry of Industry and Trade Chief Scientist Carmel Vernia, who orchestrated the hugely successful merger between Comverse and Boston Technologies four years ago. That merger brought Comverse to record heights, until the fall of the telecommunications market.
Now that NICE has boosted its annual sales in the contact centers market to an expected $154 million with this acquisition, its security division has been left with expected sales of only $63 million. I know a great company that would complement this market perfectly – ECtel (Nasdaq: ECTX). A share swap would enable these two companies to co-exist - NICE in the customer contact center recording field and ECtel in the security field, after absorbing NICE’s security division. The parties will have to make haste in this case also, because Verint has officially announced it is on the hunt for acquisitions, and ECtel seems tailor-made for it.
The above recommendations were made by a person/s working in the investment industry, who may hold positions in securities mentioned in the column. This column should not be taken as advice to buy, sell or continue to hold any securities, and anyone acting on the advice of this column does so at his or her own risk.
Published by Globes [online] - www.globes.co.il - on August 6, 2002