Security Software Provider Alladin: Temporary Weakness or Fundamental Problems? (ALDN)

Jul.12.06 | About: Aladdin Knowledge (ALDN)

I should have known that Aladdin Knowledge Systems (Nasdaq: ALDN) would fall like Check Point (Nasdaq: CHKP) did, because a long time ago I asked Aladdin founder and president Yanki Margalit, the man who defied the expectations of many people and managed to put the company he created on the map, what the difference was between Check Point and Aladdin. “If we compare it with physical security checks, Check Point is the guard sitting at the gate, while we are ones who look into peoples’ bags,” was his reply.

If that is the case, what is it that sent Aladdin climbing above $30 a share in 2004, and then back down to its current price of $16? Moreover, what was it that lifted the share from $1 to more than $30 in the two years before the peak? True, this week’s sharp fall arose from investors' disappointment at the fact that the company missed its own guidance for the second quarter of 2006, but what has happened to the company that so animated the imagination two years ago?

In light of Aladdin’s announcement of the downward revision of guidance for the results due for publication at the end of the month, analysts at CIBC have also been updating their estimates and forecasts for the quarter and the year as a whole. They now expect earnings per share of $1.12 in 2006 and $1.26 in 2007. At its present price the stock has P/E ratios of 14.8 for 2006 and 12.7 for 2007, and in the high-tech world these ratios are fairly anemic and certainly wouldn’t have existed when the stock was at $30.

Are analysts adopting a defensive position here, or have they really checked and found weaknesses in Aladdin’s areas of activity?

According to Yanki Margalit, the problem stems from a temporary weakness in the market, and therefore the company had to revise its figures downwards. It expects that, just as its previous years were good, so the future ones will be as well.

Supposing he’s right (and I have no reason to think that he knows less than the experts), what does the stock say? The stock “explains”, mainly to Margalit, but also to the analysts, that what applies to Check Point also applies to Aladdin. Just as in the case of Check Point, Aladdin’s stock price also has built in all the possible errors, problems and even fears. So if the stock continues to go down, or fails to rise, it simply means that the investors’ decision scale in relation to Aladdin has changed, and it is now valued at a lower figure.

I have no idea whether this happened because of the analysts or because of the "general risk" I referred to earlier. One thing is certain, however, and that is that the stock is not falling because its economic quality today is lower than when it appeared in public with a value of $30.

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