No Good Explanation for ECtel's Decline

The company that I think could demonstrate my theory about niches and management is ECtel Ltd. (Nasdaq: ECTX). In early May, following a series of favorable announcements, its share rose to $5.75, 34% above its current price.

Reading the company’s second quarter financials, which were published on Monday, leaves one wondering why the share is so far below its 12-month peak of early May, given that its condition is so much better now than it’s been in years. Has something happened since May? Did something happen before May? Did anything happen at all? No, nothing has happened, except a bout of pessimism among investors for unknown reasons. But if we step out of the concrete jungle of Wall Street for a moment and look at ECtel on Main Street, you’ll discover something interesting. On Main Street, all is running as expected.

ECtel’s financials indicate that progress is more than satisfactory. More importantly, with each day that passes, the field in which the company operates,and the solutions which it provides are becoming more important for large telecommunications providers. Illegal network use has long been a painful problem, but large companies have barely begun to tackle it. I have no doubt about one thing; when large companies wake up to the problem of fraud and revenue assurance, the potential of companies like ECtel will soar a thousand-fold.

In the press release accompanying the financials, ECtel president and CEO Eitan Naor said, “The second quarter continues our trend of growing revenues, improving margins and profitability, and marks the completion of the integration of Elron Telesoft into ECtel. We are now able to offer operators a full range of attractive and cost efficientIRM (Integrated Revenue Management) solutions that include both fraud prevention and revenue assurance." He went on to mention the company’s rapid global expansion.

If that is the case, why is ECtel’s share falling? It’s very hard to fathom. The sellers could be ECI Telecom Ltd. (Nasdaq: ECIL) shareholders who previously received ECtel shares. I think that the real reason for the share’s slide since May is related to the drop in all communications stocks during this period. I’ve examined a number of communications shares, and they’ve all gone down since early May.

There’s a problem with this explanation, however, since ECtel’s competitors are huge companies that also provide solutions for financial fraud and revenue assurance. It’s very hard to identify companies that precisely resemble ECtel. I therefore conclude that ECtel’s slide is because of “a bleak mood on Wall Street”. It is therefore very worthwhile to look at this company, and if you conclude, as I do, that nothing bad is happening there, then this is a buying opportunity.

ECTX 1-yr Chart

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.