AudioCodes Ltd. (Nasdaq: AUDC; TASE: AUDC) has found itself in the worst possible situation that a company trading on Wall Street could be in. Just as the market is falling en-masse, and the overall sentiment is bad, along comes this company and announces that it will not meet its guidance for the first quarter of 2007, and that instead of sales rising by 5% over the first quarter of 2006, it now expects them to fall by 12-14%. But the problem that I detect in AudioCodes at present, is far more significant that just another temporary glitch.
After reading the statement made by company founder and chairman Shabtai Adlersberg, it looks to me that like there's more here than meets the eye, and I when say eye I refer to that of Adlersberg himself. While he did say that he hoped that this would be a minor setback and that the company would recover soon, there can be no doubting that the situation on the market has proved him wrong and left him extremely concerned.
The question now is not whether this is indeed a temporary setback, but whether the company itself could be losing ground in a niche where it has been one of the leaders for years. It's difficult to ascertain exactly where the problem lies. On the one hand, I have been bombarded with stories about the phenomenal growth in VoIP and then along comes Adlersberg and says that, "In the face of weaker market conditions, we believe it prudent at this time for us to revise our previous guidance." As my expertise in VoIP is somewhat limited, I have difficulty understanding whether Adlersberg is referring to an overall weakness in markets or that of AudioCodes specifically, and I find that worrying. That said, in recent years the punishments that Wall Street has been meting out for failing to meet guidance have consistently lacked any economic rationale.
Supposing Adlersberg is right and that the company does indeed climb back within a quarter or two; if that is the assumption that he is working on, then once the analysts, whose current consensus estimate predicts earnings per share of $0.47 for 2007, revise downwards their estimate to the $0.39-0.40 range, (17-18% lower), at a price of $7, the stock will have a multiple of 17.5 for 2007 - a multiple that is most definitely a signal to buy rather than sell.
So I am in a quandary regarding AudioCodes. On the one hand, judging by history, I am inclined to believe Adlersberg and see the present stock price, as "an interesting pickup opportunity." But having said this, what will happen if this talented man is proved wrong, and the markets continue to be hostile towards the company? Is it any wonder that sitting in a VoIP-specialist exchange traded fund is now a better option than sticking with a single stock?
Elbit Systems - Sophisticated defense technologies for the next decade
I was pleased to finally see the right description given to the business of Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), one of my top picks for the next decade. The right description is International Defense Electronics Company. I would add the word sophisticated after International, but even without it, the description is appropriate. It should be understood that defense electronics will be the big story of the next decade or until they beat terrorism - whichever comes first.
It looks clear to me that as Israel will be staying in the US camp (the other side simply doesn't want us, even though it would be happy to use the products of the Haifa company), Elbit Systems will grow at the expense of the current government-controlled defense industries. It will take time and a lot of convincing and battles with workers' committees and interested parties but eventually Elbit Systems will gobble up fast-growing government companies. So between the ongoing privatization and the company's own organic growth, I feel safe for the next 20 years.
20 years, however, is a long time, so let's take another look at how things are at present. I'll start with the company's orders backlog (which, I was told, is real and is anchored by contracts), which stood at $3.79 billion at the end of 2006, compared with $3.35 billion at the end of 2005. 70% of the orders backlog is scheduled for delivery through 2007-2008, and 68% of it is to customers outside Israel. Elbit Systems' revenue rose by more than 42% to $1.523 billion in 2006, from $1.07 billion in 2005. Net profit soared 122% to $72 million, while diluted earnings per share climbed 120.5% to $1.72 from $0.78. The company accomplished all this despite the burden on its financial statements caused by the acquisition of Elisra Group.
Although I'm very keen about Elbit Systems, especially with regard to its long-term prospects, it nevertheless does have a few weak points. Firstly, the balance sheet is weak in terms of its assets versus its liabilities. A company like Elbit Systems, which could find itself bidding for mega deals, ought to have a stronger balance sheet. There has, however, been a great improvement, compared with the days when I first started following the company many years ago, but I'll be quite happy if this continues to be the only blip on the horizon. Then there is also the company's profit margins which I feel are a tad low. The net profit on sales is too low (certainly when compared with that of the company's US rivals). Having noted all this, I have no doubt that company CEO and president Joseph Ackerman has a good grasp of the issues involved here and that the company will continue its streamlining, strengthening its financial base even further.
Published by Globes [online], Israel business news - www.globes.co.il - on March 15, 2007
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