Why is the Gap Between Nice and Verint So Great?

One of the most interesting companies in the surveillance-monitoring-identification-documentation-etc. field is NICE Systems Ltd. (Nasdaq: 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 of $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.

NICE, VRNT 3-yr Chart

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