Aside from the speculation over a possible hike in US interest rates, the new trading week will be influenced by the war raging in Israel. As long as it continues, investors are concerned since the level of uncertainty is high and there is always a lingering fear that the current hostilities could deteriorate into a massive regional conflict.
At the micro level, the upcoming report by Cisco Corp (Nasdaq: CSCO) and the conference call by CEO and president John Chambers will have a substantial influence on trading in tech stocks later this week, with the focus placed squarely on those companies that work with Cisco. These span the entire food chain of the telecommunications equipment sector, especially chip manufacturers such as Marvell Technology Group (Nasdaq: MRVL), Broadcom Corp (Nasdaq: BRCM), and others.
One of the small Israeli stocks currently in my portfolio PowerDsine (Nasdaq: PDSN), which is beginning a comeback because of Cisco. It has risen 17% since the beginning of 2006, to complete a 36% jump since the tough warning of mid-December 2005. Nasdaq itself, on the other hand has fallen 5% since the beginning of the year.
In the last two days alone, PowerDsine rose more than 13% on high volume to close at more than $8 for the first time since May. It reached that price back then due to a ‘false alarm’ at Cisco. Since almost its first day as a public company two years ago, PowerDsine has been traded as a “Cisco dream.” Analysts at Smith Barney went even further, describing it as a “Cisco call option”. Cisco was always a potential major client, but preferred to work with PowerDsine’s competitors, although everyone hoped that a relationship between the two was in the offing. As an OEM customer, Cisco has tremendous significance for PowerDsine since it controls more than 60% of the market in which PowerDsine operates transmission of power over telecommunications networks, or PoE (power-over-Ethernet).
One popular application in this field is power-over-Ethernet for VoIP handsets, which have become a standard appliance in many large enterprises. Most such handsets are manufactured by Cisco or Avaya Inc. (NYSE: AV), a PowerDsine customer. In the not-too-distant future, office laptops will be powered by the Internet lines to which they are connected without the need for a cumbersome charger which needs to be carried around. PowerDsine will probably sign an OEM agreement with Cisco, although the two companies have had a business relationship at various levels of cooperation for more than a year. Rumor has it that Linksys, Cisco’s subsidiary that specializes in home and office wireless networks, has already integrated PowerDsine’s PoE in its new launches.
For more than a year, Cisco has been describing PowerDsine as a member of its “Technological Development Partnership”, and it often participates in Cisco’s trade shows and marketing conferences. All that is needed now is a small push to elevate it to the status of OEM supplier, although for PowerDsine this will be a monumental leap forward.
In its conference call on the second quarter results, PowerDsine management indicated that the company would move to profitability in the third quarter, with sales rising 13% from $9.5 million in the second quarter. The company has $3.4 per share in cash, and if Cisco does indeed become an OEM customer by the end of this year, 2007 could see the big turnaround that PowerDsine’s investors have been dreaming of since it was floated back in 2004.
Just last Thursday, I wrote of another turnaround that I scented at Taro Pharmaceutical Industries (Nasdaq: TARO), which was unrelated to any change in ownership. So I was surprised to learn next day that global mutual fund manager Franklin Resources Inc. (NYSE:BEN; LSE: FRK) (Franklin Templeton) was increasing its stake in Taro to 16.8%. By doing so, it sent a blunt message to Taro’s management and owners that it was not the kind of investor that would sit around idly in view of the company’s dire situation, which has also been seen in its stock price.
Before I go any further on this, I would just like add that another person who should be worrying about Franklin Templeton is Check Point (Nasdaq: CHKP) CEO Gil Shwed. Franklin Templeton is Check Point’s largest investor and in recent months it significantly increased its investment by six million shares to 33.7 million in all, a 14.2% stake, even larger than that held by Shwed himself. Notwithstanding the vast difference between the management of Taro and Check Point, both companies have recently hit an annual low that Franklin Templeton managers will find worrying.
The difference between its investment in Taro and in Check Point is due, among other things, to the fact that most of the investment in Taro came from Franklin Templeton’s regional arm in Singapore, while the investment in Check Point was transacted from the US and Bermuda. This is worthy of note, since the company’s investment manager in Singapore, is economist Dr. Mark Mobius - a guru with a record of more than 30 years of investment in emerging markets, especially in South East Asia. Mobius has a reputation as a bargain hunter who is not intimidated, not even by battle zones. It was he who began investing in Myanmar, long before anyone knew that this was another name for the country of Burma, which is controlled by a military regime. It is said that a trader on the stock exchange in Thailand once held a gun to Mobius’s head and threatened to pull the trigger if the market went down. “Fantastic, that’s the market I want to invest in,” he replied.
”Has Mobius been in Israel recently?” I asked someone who might have an inkling as to the guru’s latest movements. “Yes, he was here several months ago,” came back the surprising reply. It was then that I realized why Franklin Templeton had increased its stake in Taro. Mobius has been described by professionals as an investor who looks for value in places where other people think it doesn’t exist. He conducts his search by making a thorough investigation on the ground, in a process described as “bottom up.” In other words, he wades through the oil and grease on the production floor, before he talks to managers in air conditioned conference rooms and sees smart presentations.
If Mobius was at Taro’s manufacturing plant in the Haifa Bay area several months ago, he will have discovered a state-of-the art plant working at full capacity, after being approved earlier this year by US Food and Drug Administration (FDA) officials. He will also have discovered the considerable real estate value in Taro’s properties in the Krayot as well as the sophisticated R&D laboratories that have, among other things, produced an ethical drug with a potential annual market of $1 billion. This drug is currently undergoing Phase III clinical trials in Canada.
A person like Mobius who invests in small emerging markets in South East Asia will be not be daunted by the prospect that Taro could be delisted from Nasdaq. Any such delisting cannot erase the value contained in the company itself, as the new investors in Mercury Interactive Corp. (Pink Sheets:MERQE) discovered when they acquired it two weeks ago.
Franklin Templeton’s legal team will no doubt have studied the complex control structure at Taro, which according to the company’s statement in the annual report for 2004 has three directors who hold 45.6% of the voting rights. The same report also stated that the company’s ownership structure, and its legal definition in the US, create a negative incentive for institutional investors based in the US wishing to acquire stake of more 15% in the company, since they won’t get more than 10% of the control. Taro apparently did not think there were investors such as Franklin Templeton, with funds generated outside of the US. Incidentally the other fund that has invested in Taro (11.2%) is not American either, but Canadian.
To sum up, the next few months will see some interesting developments at Taro, with the possible result being a cooperation between the owners and external investors with a view to lifting the stock to much higher values than those at present. They will work together even if that means selling the company in its entirety to one of the many private leveraged buyout funds that operate today.
Published by Globes [online], Israel business news - www.globes.co.il - on August 8, 2006
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