It is widely known that the Israeli economy was better managed than most during the Great Recession. The Bank of Israel did a good setting economic policy, including the braking and acceleration plan, and was among the first of the central banks to start raising interest rates. In the fourth quarter of 2010, Israel’s GDP grew at the seasonally adjusted annualized rate of 7.8%. GDP rose by an annualized 5.4% in the second half of last year, after rising 5% in the first half. I wonder what Bernanke or Obama give for growth rates like this.
We took a look at the more than 100 Israeli companies trading on one of the New York exchanges and came up with four companies of interest. Each of these companies had less than stellar stock market returns during the past year yet they are all profitable and each shows improvement in various measures of profitability, liquidity and efficiency.
Amdox Ltd. (DOX) is a provider of software and services for communications, media and entertainment industry service providers. The company develops implements and manages software and services associated with business support systems (BSS) and operational support systems (OSS). Its product offerings consist of a software portfolio developed to provide customer experience systems functionality for service providers. The software systems support the full span of the customer lifecycle: revenue management, customer management, service and resource management and service delivery. During the fiscal year ended September 30, 2010 (fiscal 2010), it released the Amdocs Customer Experience Systems (CES) 8 portfolio. In fiscal 2010, it acquired jNetX and MX Telecom. In April 2010, it divested an 81% majority stake in Longshine Information Technology Company Ltd., its Chinese subsidiary.
Amdox has a September fiscal year. In 1Q10, earnings per share declined to $0.38 as compared to $0.43 per share in the year ago quarter. On the other hand, sales increased to $775.2 million from $724.8 million. Amdocs announced that for the second quarter of 2011, it expects revenue to be approximately $775-$790 million. Diluted earnings per share (EPS) on a non-GAAP basis for the second quarter 2011 are expected to be $0.53-$0.60, excluding acquisition-related costs and approximately $0.03-$0.04 per share of equity-based compensation expense, net of related tax effects. Amdocs estimates GAAP diluted earnings per share for the second quarter will be $0.43-$0.51. For fiscal 2011, the company expects revenue growth of 4%-6% as compared to fiscal 2010. The company reported revenue of $2.984 billion in fiscal 2010. According to Reuters Estimates, analysts are expecting the company to report revenue of $778 million and EPS of $0.56 for the second quarter of 2011; and revenue of $3.145 billion for fiscal 2011.
Based on trailing twelve month earnings of $1.64, Amdox is trading at 18X earnings. Looking towards FY11, the forward PE is 13X based on consensus earnings of $2.26 and for FY12, 12X estimated earnings of $2.42. We like the fact that Amdox provides cash return on invested capital of about 14.6% and is reasonably valued with an EV/EBITDA ratio of about 11%. The EV/FCF ratio is 9X.
Amdox is well capitalized and carries no long term debt. About 85% of the company’s invested capital is equity. The company’s gross margin was better in FY10 than it was in FY09 though the trailing twelve months show a slight decline. Asset turnover is stable to slightly improving.
Amdox does not grow sales or earnings quickly. However, sales and earnings grow steadily over the years. We have a target price of $35.50 on Amdocs.
Cellcom Israel Ltd. (CEL) incorporated in 1994, is a provider of cellular communications services in Israel. The company offers a range of cellular services through its cellular networks. These services include basic and advanced cellular telephone services, text and multimedia messaging services, and advanced cellular content and data services. The company suffered a major network malfunction on, December 1, 2010, that impacted the company's subscribers' ability to utilize its services. The company has since resumed full service. Several potential class action lawsuits relating to the network malfunction are pending.
The company is trading at 9.2X trailing earnings of $3.37. For the quarter ending 9/30/10, earnings were $0.90 as compared to the one year ago earnings of $0.79. Sales rose to $1,793.8 million for the trailing twelve months ending 09/30/10 as compared to $1,733.6 million the previous year. Sales grow at the rate of 3%-5% per year. The five year growth rate for earnings per share is 13.4%. We have a P/E/G ratio of 0.7X which implies this company is trading at a discount. Cellcom has an EV/EBITDA ratio of 8.9X, and an EV/FCF ratio of 9.5X; both are moderate.
The company’s profitability is growing, as measured by Return on Assets. The ratio has expanded to 19.9% for TTM and FY09 from 16.8% in FY08. Operating cash flow is positive and exceeds net income before extraordinary items. The balance sheet is fairly solid. Total Liabilities to Total Assets declined in the past year though the current ratio is less robust. On a favorable note, gross margins continue to expand and, in fact, are at their highest since 2003. Asset turnover has remained stable over the past several years.
Cellcom is another company that does not grow quickly but it steadily expands. It also pays a dividend of $3.75 per share yielding more than 11%. We think the PE can expand to 12.5X.
Marvell Technology Group Ltd. (MRVL), incorporated in January 1995, is a fabless semiconductor provider of application-specific standard products. The company develops complex system-on-a-chip (SoC) devices using its technology portfolio of intellectual property in the areas of analog, mixed-signal, digital signal processing and embedded advanced RISC machine (ARM)-based microprocessor integrated circuits. The company’s product portfolio includes devices for data storage, enterprise-class Ethernet data switching, Ethernet physical-layer transceivers (PHY), handheld cellular, Ethernet-based wireless networking, personal area networking, Ethernet-based personal computer (PC) connectivity, control plane communications controllers, video-image processing and power management solutions. Its products serve applications used in carrier, metropolitan, enterprise and PC-client data communications and storage systems. Additionally, it serves the consumer electronics market for the convergence of voice, video and data applications.
Marvel is a high growth company with a slew of new product introductions. Some of the more recent announcements are:
- Marvell Announces First 'World Phone' Single Chip Solution: 3G TD-SCDMA Baseband Combining High Performance 1.2 GHz Application Processor with Advanced 3D Graphics and 1080p Multimedia
- Marvell Introduces Kinoma - Revolutionary Open Software Platform to Unify Applications
- Marvell Unveils Industry's First 'Mobile MIMO' Wi-Fi Solution
Sales have grown at the rate of 43.4%, 7.9% and 18.1% over the past one, three and five years at Marvell. Net income has grown at the rate of 960%, 215% and 41% also over the past one, three and five year periods. Sales in the quarter ending 10/30/10 were $959.3 million as compared to $803.1 million year-over-year. Trailing twelve months sales were $3,553.9 million compared to the year-over-year total of $2,478.0 million. Earnings in the quarter ending 10/10 were $0.38 as compared to $0.31. Earnings soared in the twelve months ending 10/30/10 to $1.32 from $0.11 in the comparable year ago period.
Cash and short-term investments were $2,675.3 million compared to total liabilities of $893.7 million. Marvell has no long term debt. Profitability, as measured by return on assets continues to improve. As of 10/30/10, ROA stood at 15.7% as compared to 7.4% on 1/2010. ROA is at its highest level in years. The company’s cash from operations far exceeds net income before extraordinary items.
The current ratio is a strong 4.9X and is higher now than in the past. Total Liabilities to Total Assets is a low 14.6%. Gross margins have expanded to 59.4$ and stand at their highest levels. Asset turnover, at 0.6X has been stable over the years though not as good as the industry median.
Marvell has a lot of potential. It is currently trading at 14.4X trailing earnings of $1.32 and 11.4X estimated earnings of $1.65. It has a P/E/G Estimated EPS of 0.8. By our estimate, Marvell is trading at an EV/EBITDA multiple of 9.9X and an EV/FCF multiple of 8.75X. Both are moderate ratios. We see a short term target of $24.
Our last company is Partner Communications Company (PTNR), another telecom play. Partner Communications Company Ltd. (Partner) is a mobile telephone network operator in Israel. The company’s products and services are marketed under the Orange brand. During the year ended December 31, 2009, its global system for mobile communications/universal mobile telecommunications system (GSM/UMTS) network covered over 98% of the Israeli population. Its GSM services include standard and enhanced GSM services, as well as value-added services and products, such as roaming, voice mail, voice messaging, color picture messaging, ringtone and game downloads, information services, and general packet radio services (GPRS), which enables the packet transfer of data. Its third generation (3G) network offers a range of services, such as video calls, a new portal of content services, including a rich selection of video-based services under the orange time sub-brand, and the transmission of data.
Partner has trailing month earnings of $2.19 and estimated 2010 earnings of $2.17. The trailing PE is 8.8X. The P/E/G ratio is a low 0.4X. The company has a five year earnings growth rate of 23.4 and yields 10.9% on a dividend of $2.17 per share. In the quarter ending 9/10, earnings were $0.54 as compared to $0.46 in the year ago quarter. Sales in the quarter ending 9/10 were $448.5 million as compared to $428.1 million in the prior year. In the twelve months ending 9/10, sales were $1,764.3 million.
Partner has cash and short-term investments of $131.3 million and long term debt of $701.0 million. The current ratio is a low 0.8X. Gross margins are 38.8% and represent an improvement over prior years. Asset turnover is 1.2X and has remained relatively stable over the years. Liabilities to Assets have increased to 89.0% from 65.1% in FY09. This is a red flag.
Partner has an EV/EBITDA ratio of 8.43 and an EV/FCF ratio of 10.26; both are moderate. The company is highly leveraged and that is not to our liking. However, this situation is not all that unusual with telecom companies. Our target price is $26.50.
Each of these companies offers an opportunity but not without risk. To one extent or another, we see improving financials. Depending on how you measure value, these companies also appear to be undervalued.