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Today I’ll take a look at Magic Software Enterprises (Nasdaq: MGIC) one of the oldest software companies in Israel, and certainly the oldest of all the Israeli companies trading on Wall Street.

Looking at it from the birds-eye vantage point, why is the stock price so low? Maybe the current price of $2.50 isn’t that low? After all, this is a company with a strong balance sheet and $12 million in cash which has shown clear signs of emerging from its recent crisis and moving to profitability. It has sales upwards of $61 million, a fine reputation with 2000 companies on Main Street, R&D centers in India and Israel, a good management, and other similar strong points. Yet despite all this, its market cap stands at around $80 million only. This looks to me like a value that is out of touch with reality, but let’s take a closer look at the company.

Magic was founded in 1983 by current chairman and CEO David Assia (who left the post twice for fairly long periods, and was then called back twice, essentially to put the company back on its feet, the last occasion being three years ago), and his friend and partner Jack (Yaki) Dunietz, who also founded Mashov Marketing and is one of Israel’s most experienced software managers. Magic was floated on Nasdaq in 1991 in one of the hottest IPOs of the time, and the reason for the success back then was not the amazing achievements that the company told everyone about, but was due instead to a single utterance by a commentator on CNN Financial. His pronouncement that “as far as I can see, there is only interesting flotation this week and that is California-based Magic Software,” turned the IPO from a lackluster event to a really hot one.

What does Magic actually do? Overall, I would define its line of business as the integration between various software systems, to optimize a company’s business management processes. Creating various software applications is a never-ending process that is improving and becoming more advanced all the time, and as a result, there is a constant challenge to ensure compatibility between platforms, thereby maximizing efficacy.

Magic has a lot of experience in this field, and it has firmly established its presence on this particular market. The company has developed platforms such eDeveloper, which enables companies to develop new software and applications that are tailored in accordance with changing system requirements. It also offers the iBOLT business integration suite, which enables the integration of new and existing systems. The fact that the company has 20 years experience places it in the top line of integration companies which focus on helping software companies and others adapt their platforms to the constant developments in business technology.

Magic’s latest deal, which it reported back in December, was the sale of iBOLT and eDeveloper services to Farm Mutual Reinsurance Plan [FMRP], which provides reinsurance services through rural mutual insurance companies across Canada. FMRP will use Magic’s software to integrate Oracle software on the company’s IBM platform. FMRP information systems manager Jack Black said, “With iBOLT and eDeveloper, FMRP is able to fully leverage the business process enhancements possible on the IBM System, which is widely regarded as the most scalable and reliable platform for secure business transactions. Magic Software and its business partners provide us with the reliable technology, platform knowledge, and professional consulting services needed for the business process reengineering we required.”

In the world of the giants, from Oracle to SAP and IBM, a company like Magic has the requisite expertise to serve as integrator. Statistics on IT projects show that 68% of all IT projects in 2007 will focus on business integration. This is one of the fastest growing fields and according to Massachusetts market research company WinterGreen Research, the value of the market will rise from $1.7 billion in 2005, to $2.3 billion in 2006, $2.8 billion in 2007 and $3.4 billion in 2008. This is Magic’s key field of activity, and it has two strong growth engines to help it make its way forward. The company’s unique relationships with SAP and IBM can only assist it in achieving its goals.

Magic forecasts that its sales will rise to $98 million in 2008, and that it will make an acquisition or two on the way, while focusing on its core business activity, and exiting all those subsidiaries which are not in this specific field. The controlling stake in Magic is held by Emblaze [LSE: BLZ], which recently acquired the controlling interest in Formula Systems (Nasdaq: FORTY).

Knowing David Assia as I do, I have no doubt that he will lead Magic forward, in line with the strategy that he set for it, since he has done this before, and no one knows this field better than he does. Wall Street knows Assia too, and it knows that he can deliver the kind of leadership it likes to see. I think that the company should bring in a competent CEO whom Assia can groom to eventually replace him as chairman. The only thing that still isn’t clear to me is how Emblaze would respond to such an idea, since it is now the controlling shareholder and I find it difficult to predict what it will do with its controlling stake.

In my opinion, had Magic’s stock been traded on the Tel Aviv Stock Exchange [TASE] only, its price would have been higher, but it is, of course traded in New York as well and it is this factor that has been causing the downward pressure. Why? Because the market over there wants to know if Assia can repeat his past success, whether Emblaze will be a better mother than Formula and, most important of all, whether the business integration will make the progress expected of it.

I believe that seeing that the company has been posting improvements across all aspects of its performance, there is a good chance that it will move to profit and record even faster growth, so this would be suitable time to enter the company while the price is fair. But this is my view only, and as in every such case, please check it out with other experts.

MGIC 1-yr chart:

mgic

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.

Source: Magic Software: Management Should Take It To Next Level