Wireless information security is a sector chock full of business opportunity. The whole world has gone on line, together with all kinds of criminals. Despite all the well-known names in Internet data security, including of course Check Point Software Technologies Ltd. (Nasdaq: CHKP), one thing is certain: the net is full of holes, and as technologies develop, theft and hacking technologies, intended to steal everything from personal data to software and patents, develop in tandem.
I direct my readers to the popular technology news site TechNewsWorld, which published a fascinating article, “Securing Corporate Networks in a Wired World” by Finjan Software CTO Yuval Ben-Itzhak on September 26. Ben-Itzhak previously worked for Ness Technologies (Nasdaq: NSTC), which I will mention later. Some of the world’s top venture capital funds have invested in Finjan, including the corporate funds of Microsoft Corp. (Nasdaq:MSFT) and Cisco Systems Inc. (Nasdaq:CSCO).
One of the most interesting companies in the surveillance-monitoring-identification-documentation-etc. field is NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE). I’ve written quite a bit about NICE in the past, and it’s been in my top picks list for a long time, but in recent years, its share had a premium, which from the perspective of investors has created the Marvell Technology Group (Nasdaq: MRVL) problem. In other words, technically, NICE’s share was too expensive, and even though I believe in the company, it was hard for me to recommend it at the prices it was traded. NICE represents the ultimate merger - a rapidly expanding niche, expectations of further growth by the company over the coming years, top-of-the-line products, and exceptional management. Investors should own shares like this, period.
NICE CEO Haim Shani joined the company in early 2001 from Applied Materials Inc. (Nasdaq:AMAT), where he ran the company’s Israeli branch. Shani, it can now be said, took over NICE during a severe crisis, fixed and improved the company and turned into a leader with a rosy future. Investors happily paid for this. What does this mean? At some point, when investors realized who the man was and what he could do, they set a permanent premium on the share. When a share is traded at a premium for years, it’s good for investors, employees, and management; they all benefit. From $3.50 in early October 2002, NICE is now traded at $27.30.
P/e ratios of 24 for 2006 and 20 for 2007 are now considered high. Nevertheless, 10 of the 15 analysts covering NICE give the share a “Buy” recommendation, and the other five rate it at “Hold”. Oscar Gruss analyst Ronny Biran gives its “Buy” recommendation with a target price fo $31.
NICE competes against Comverse Technology Inc. (Nasdaq: CMVT) subsidiary Verint Systems Inc. (Nasdaq: VRNT). In terms of numbers the two companies are quite similar, and were also so in the past, until late 2004 Verint traded at a much higher premium and values than NICE. However, their relative situations subsequently reversed. NICE is now traded at values 30% higher than those of Verint, whereas in 2003 and 2004, Verint was traded at as much as five times the value of NICE. According to the analysts’ consensus, Verint will report a net profit of $42 million on $380 million in sales in 2007. This means a 420% increase in profit, compared with 2004, and a 96% increase in revenue. The share has nevertheless fallen 17% since 2005.
NICE, in contrast, has seen its sales rise 115% over the same period from $224.3 million to $483 million. The company’s net profit will rise 171% from $24.5 million in 2004 to an analysts’ consensus of $66.5 million. The share has risen 140% since the beginning of 2005.
What creates such a difference between the shares of NICE and Verint? Only investors’ confidence in management. It took more than two years for the market to realize that NICE has changed direction, and the premium is the response to the promises made and met. If we look at the multiples predicted for 2006 and 2007 for the two companies, they appear quite similar. It’s true that NICE’s growth rate over the past three years has been higher than Verint’s, but that’s not enough to justify a 17% drop in Verint’s share and a 140% rise in NICE’s.
The electronic surveillance and defense sector naturally also includes Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), my number one share pick for the next decade. Elbit Systems is at an all-time high, but its p/e ratios are still a modest 17 for 2006 and 15 for 2007. I won’t wax loquaciously on the company today, and merely note that I checked with the help of Steven’s gang, and could not find even one US company that really resembled Elbit Systems in what I call “readiness for development in smart electronics for the next decade”.
Don’t misunderstand me, I do not mean that Elbit Systems has something the US or French companies lack in the field of smart electronics, and the company unquestionably lacks their market power, but it can offer companies and countries flexibility and creativity that the giants cannot. This is why when a giant like Boeing Co. (NYSE:BA) or Lockheed Martin Co. (NYSE:LMT) wins a huge interdisciplinary tender, whether in the US or in other countries, Elbit Systems has a better chance of participating in the project as a subcontractor than companies doe.
Now for Ness. I read a Merrill Lynch report on the company. First, a word about Ness’s contract with NEC US, a subsidiary of Japan’s NEC Corporation (Nasdaq: NIPNY; TSE: 6701). The contract talks about expanding the strategic agreement between the two companies, but anyone carefully reading the press release sees a lot more than the words say. Since the contract was signed after a long period of collaboration, and since the new agreement is much more comprehensive and broad than the previous one, we may assume that NEC is pleased by the joint trial with the Israeli company.
The Japanese have always been known for their slow progress in developing business relationships with non-Japanese companies. Nevertheless, when the Japanese are pleased with a partner, they’re the best partners in the world. Under the agreement, NEC US will market the Ness Innovative Business Solution (Ness IBS) to Japanese companies in the US, as well as financial and insurance companies.
In other words, we’re talking about a qualitative jump in Ness’s relations with a flagship Japanese company. Merrill Lynch wrote that Ness demonstrated in Israel that it can overcome large competitors, and it hopes to duplicate this demonstration in small parts of the world. The report adds that Ness rose to first place in the marketing of IT solutions, ahead of competitors such as IBM Corp. (NYSE:IBM) and Electronic Data Systems Corp. (NYSE:EDS). Both IBM and EDS are global leaders in IT services, and if Ness surpassed them in Israel, there is no reason it cannot do the same in other small countries, such as Bulgaria and Luxembourg.
Despite the rosy picture depicted by Merrill Lynch, I read an article in Hebrew-language news website “Ynet” on Sunday, which claimed that Ness messed up a large contract with Harel Insurance Investments Ltd. (TASE: HARL). Ynet correspondent Eli Shimoni said Ness failed to meet the task it was given and also raised the quote for the project from NIS 18 million “several years ago” to NIS 40 million. Harel announced that it intended to sever ties with Ness, and even to sue it. Shimoni said Ness declined to comment. I have no idea whether the Harel contract has been cancelled and if Harel will sue Ness or not.
It’s important for me to mention this to investors, but it seems to me that, in view of Ness’s history thus far, this is a storm in a tea cup, which will have little impact on the company’s current business or its capabilities. Investors should, however, check this matter out.
Published by Globes [online], Israel business news - www.globes.co.il - on September 27, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006