With the fairly tranquil warnings season now over, save for a few prominent Israeli companies, Wall Street’s focus will now move to the first quarter results themselves.
Talking of warnings by Israeli companies, Check Point (Nasdaq: CHKP) previously insisted that the entire sector was weak and it now appears that it was right at least with regard to mediocre niche companies. Last week saw the publication of warnings by several security companies whose stocks slumped 20%. These included SafeNet (NasdaqNM: SFNT), Websense (NasdaqNM: WBSN) and Internet Security (NasdaqNM: ISSX), which is in my portfolio. I am waiting for Check Point to buy Internet Security and perhaps that day may be closer than we thought since the Check Point of 2006 is a bruised company, hungry for acquisitions and with plenty of cash to pay for them. Internet Security, which is now cheaper, has lines of business that are similar to those of Sourcefire, which Check Point wanted to acquire and failed.
Internet Security fell almost 10% following the publication of the warning, and I was compensated for this by the increase in price of a stock that has failed to move at all for quite some time. Biomet (NasdaqNM: BMET) is one of the big manufacturers of orthopedic replacement products, a sector that has seen substantial growth. Biomet’s main rival Stryker (NYSE: SYK) recently acquired a small Israeli company named Sightline Technologies, which specializes in unique video endoscopic systems for minimally invasive procedures.
A day after M-Systems Flash Disk Pioneers (Nasdaq: FLSH) announced its sales and profit figures for the first quarter of 2006 to a worried market, came a bombshell from the Kfar Saba-based company. It announced it was terminating a contract with Korean Electronics giant Samsung. I originally thought that the company’s earlier announcement of a cooperation agreement with Intel was timed to take the sting out of results that were worrying in terms of earnings per share. Now I am sure that both the posting of results and the announcement of the agreement with Intel were timed to take the sting out of the real ground shaking news of the disengagement from Samsung that followed the next day.
Such a drastic move was not easy for M-Systems president CEO Dov Moran, especially after he repeatedly declared in every interview that his dream was to sign more supply agreements. The disengagement from Samsung was caused, I feel, by two reasons. Firstly, the NAND chip market is heading towards surplus production rather than a shortage. Secondly, M-Systems itself has added that many technologies and products to patent portfolio, it would appear that it wants to be like its rival Sandisk (NasdaqNM: SNDK) or the smaller Saifun Semiconductors Ltd. (Nasdaq:SFUN), meaning that it wants to collect royalties for the use of its unique know-how.
As Samsung is one of the largest customers in the sector M-Systems terminated the contract since with it as Samsung was paying M-Systems a mere pittance by way of ‘standing order’ rather than for the use of its knowledge in practice. The old agreement prevented M-Systems from suing not only Samsung itself but also all its customers. Many of these buy flash controllers which are then used in the manufacture of disk-on-key devices and other similar products that provide stiff competition to M-Systems’ own product line.
The decision to end the agreement with Samsung was taken now because M-Systems recently received, and is also about to receive additional new valuable patents which it has no wish to share with any of the competition and certainly not for free. We could well discover in the future that Apple, for example, is using M-Systems’ knowledge under the terms of a contract with its supplier, Samsung.
Incidentally no one has said anything about what will happen to Samsung, which was M-Systems’ biggest customer and is the world’s third largest company in its sector after Nokia (NasdaqNM: NOK) and Motorola (NasdaqNM: MOT), and has been integrating mobile chips in its range of handsets for several years. I understand from Moran’s previous comments that Samsung’s regular explanation was that its own divisions competed against one another, and what they did or didn’t do was not related in any way to its memory chip division which had developed a chip of its own that competed with the MDOC. Either way Samsung will probably comment on the M-Systems contract during the course of its conference call with analysts on Friday following the posting of its results for the first quarter of 2006.
In an article I wrote at the end of 2005, I recommended several new stocks for 2006. Among others, I said that the time was right for a jump into the Taro Pharmaceutical Industries (Nasdaq: TARO) pool, despite the fact that we risked fracturing our skulls after having taken a dive into an empty pool. I am now taking that jump and adding Taro to my portfolio as a long term investment instead of Biomet, which now looks a stock that you shouldn’t touch with a 10-foot pole. In a parallel move, short traders have increased their positions in the stock to a twelve month high of 3.2 million shares.
My decision to take the plunge with Taro was prompted by two events. Firstly, last Friday an unknown Canadian fund reported that it would be increasing its holdings in Taro, as of March, by 11.3% to more the 3.3 million shares. In addition, I learnt that officials from the US Food and Drug Administration (FDA) recently inspected the company’s new production facilities in Haifa and the visit went off without a hitch.
The FDA approval for Taro’s manufacturing operations in Haifa will, I feel, enable the company to manufacture FDA-approved drugs and ointments locally instead of in more expensive locations such as its production lines in Canada. According to the company’s annual report for 2004, the last FDA inspection in Israel was in 2002. While the upcoming results will certainly be bad or even catastrophic, the guidance for the second half of 2006 might well sound a note of optimism that will set the direction for the stock in coming months.
Published by Globes [online], Israel business news - www.globes.co.il - on April 11, 2006
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