NDS May Be Bottoming Out

NDS Group (Nasdaq: NNDS) is a company that has adapted itself to a certain niche and has reached a level of excellence in that niche, to the extent that everyone needs it. True, it has strong backing in the form of News Corp (NYSE: NWS), which has an 80% stake in the company, but this does not give NDS an advantage unless it meets the standards of excellence set by its parent.

NDS is currently at 18% below the high of $56 reached three months ago. The reasons for the fall are connected primarily to the falls on markets and the company’s rating downgrade by Goldman Sachs. Goldman Sachs didn’t so much feel there was a need to downgrade the company, but rather it believed that the NDS share had risen too high in comparison with its competitors (who are they?) and other communications companies, and that it was trading at multiples that were too high.

NDS climbed 87% within one year, a climb which came to an end in May, and recorded a 180% rise since August 2004, so the time for the tumble had arrived. True, the stock still isn’t cheap today and is traded at P/E multiples, based on the analysts’ consensus, of 20 for 2006 and 25 for 2007. I believe, however, that the stock has now reached its bottom price for the following reasons:

Firstly, the expectations across the market call for further rises in the company’s sales and profits.

Secondly, the market is gradually freeing itself from the irrational comparison with TiVo Inc. (Nasdaq: TIVO).

Even today, for example, when the 18 analysts covering TiVo (NDS only has seven analysts covering it and most of them are not from the US) have once again reached a consensus that expects the company to continue posting losses until 2008, they have nevertheless valued the company at $563 million, while the figures show it has sales of $205 million and a net loss of $42 million. In my view, NDS’s competitors are not companies like Tivo but rather the likes of Motorola (NYSE: MOT), but that’s another story.

Either way, in recent days, NDS made a series of announcements that show that the company is fully aware of the developments in the market. This was made plain by its Italian deal, in which it launched with Sky Italia -- an interactive betting platform offering Italians the ability to watch and place bets on games in the World Cup and on Italian sports in general -- in addition to a string of steps it has unveiled that will improve content marketing, both in terms of quality and protection.

I still think that NDS’s major problem, from the point of view of its market value, is related to the fact that News Corp is not selling shares, coupled with the fact that only 24% of its stock is traded on the market (which, incidentally, is a far better situation than the one the company was in before its secondary issue, but still not good for serious institutional investors). NDS’s big advantage lies in its excellent management, which knows very well how to read market developments.

Published by Globes [online], Israel business news - www.globes.co.il - on June 22, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Reprinted on Seeking Alpha with full permission.

Comments

[CrossProfit]

1) If News Corp holds an 80% stake and 24% of shares are traded on the market does that mean that 80 + 24 = 100?

2) Tivo P&L stats can be found at
www.marketwatch.com/to...;sid=0&report=...

3) Who compares NDS with Tivo?