ECI: Israel's Technological Flagship

Mar. 1.07 | About: ECI Telecom (ECIL)

Today I’ll take another look at the veteran telecommunications equipment company ECI Telecom Ltd. (Nasdaq: ECIL), the State of Israel’s technology flagship. Many will beg to differ about this, but the older ones among us will no doubt remember that ECI spread the word about the quality of Israeli technology, long before frontline technology companies such as Given Imaging Ltd. (Nasdaq: GIVN; TASE: GIVN), NICE Systems Ltd. (Nasdaq: NICE), Comverse Technology Inc. (Pink Sheets: CMVT.PK), Amdocs Ltd. (NYSE: DOX), Marvell Technology Group (Nasdaq: MRVL), Syneron Medical Ltd. (Nasdaq: ELOS), made their mark on the global stage.

ECI became renowned as a highly advanced technology incubator as far back as the early 1980s. By the middle of that decade, people were saying that AT&T Inc. (NYSE: T) might acquire ECI because of its advanced technologies. The company was originally founded in 1961 and it floated on Nasdaq in 1982. It offers advanced communications solutions to telecommunications carriers and providers. ECI’s solutions help carriers and providers increase their revenues and streamline their systems.

As I see it, ECI’s activity is quite similar to that of Comverse Technology, although the two companies also have businesses that are not similar at all.

The company’s activity is now divided into three segments:

• The Optical Networks Division, which specializes in optical transport network design and support;

• The Broadband Access Division, which focuses on platforms and gateways for broadband communications;

• The Data Networking Division, which specializes in routing technology for data network management.

ECI offers its customers the most advanced technologies available in all three fields, and it is also one of the leaders in terms of the extent of its global deployment.

Because ECI began developing its global reach long before most Israeli companies did, it has forged strong commercial ties worldwide. It moved from sales of $421 million and a massive $72 million loss in 2003 to $656 million sales and a net profit of $22 million in 2006. Both the analysts and company management believe that the company will deliver a significant improvement in its business in 2007, and this is also the overall picture of the company’s fortunes on Main Street in recent years. It should also be remembered that between 2000-2003 the company teetered on the verge of bankruptcy, largely because of bad management, and it was only the promotion of veteran CMO Doron Inbar to CEO that saved ECI from breaking up.

ECI’s stock has also had an interesting history, gaining sevenfold in value from November 2002 through January 2004. This can be attributed to a number of factors, some of which are related to the company’s business, while others are related to Wall Street. Although Inbar’s appointment as CEO in 2001 was the defining event in the company’s comeback, in 2002 with the stock already heading north, few people believed in the former CMO’s capabilities. Inbar’s contribution was recognized later on, but the most important factor of all in the stock’s climb during those years was the revival of business in the telecommunications sector. Investors realized, slowly at first, and then rapidly, that telecommunications was not dead (as the experts had promised), and that it was emerging from the crisis that overwhelmed the sector following the bubble in 2000.

If we look at the technology field on Wall Street during the period from the end of 2002 through early 2004, we will discover that the technology block in its entirety, from Microsoft Corp. (Nasdaq: MSFT) to Commtouch Software Ltd. (Nasdaq: CTCH), moved upward with ever-increasing intensity, on the basis of the realization that the economic recovery was indeed gathering momentum. On closer observation of the companies in this block from Microsoft down to Commtouch, it becomes apparent that there were stocks whose performance was much higher than the average alongside those whose performance was average or lower.

Companies in the telecommunications sector, or those engaged in lines of business which the analysts promised would recover much faster - such as the cellular, broadband, optic and satellite sectors - simply skyrocketed. This happened because, for stocks like these, jumps amounting to hundreds of percentage points could be considered reasonable. “After all,” the brokers explained, “The lows at the end of 2002 were no less insane than the March 2000 high.” With everyone busy buying shares and analysts eagerly egging them on, 2004 brought with it the realization among the public at large (before the analysts saw it, one should add), that in all the excitement over the end of the crisis in the markets, no one had remembered to check out what exactly was happening over on Main Street.

In 2003, for example, everyone was waxing lyrical about the impending take over by WiMAX, talk which lifted Alvarion Ltd. (Nasdaq: ALVR) to a market cap of $1.1 billion. By 2004 people had realized two things about WiMAX. One was that there was no chance of the technology taking over before the end of 2007, and second, that there was competition for the leadership in the field, with other rival technologies also appearing on the horizon. Note that ever since it fell, Alvarion responds solely to the experts’ pronouncements on the success, or lack of it, of WiMAX.

The story is much the same with ECI. The stock was carried upward on the revival sweeping through Wall Street, a revival which lasted until 2004, when those riding the high tide began looking over their shoulders at Main Street. Rattled by the chasm between imagination and reality, the stocks ground to a halt. Such is not the case with Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA), Wal-Mart Stores Inc. (NYSE: WMT), and even Elbit Systems Ltd. (Nasdaq: ESLT). Why? Because in those companies, investors understand what it’s all about, and they know exactly what the company’s business is, and where it is headed. How many of you know whether or not ECI’s broadband access division will eventually become a major success? Do any of you know what this division actually does? And how many of you understand the technologies involved here and who uses them?

The proof that I am right about the lack of understanding among investors, can be seen in the success of the various stock and exchange traded funds (ETFs). After all, any investor who could tell the difference between ECI and Comverse, or between Alcatel and Lucent, wouldn’t need a specialist ETF, but those ETFs and other similar instruments have give investors the chance to participate in the game without understanding what exactly it is that the companies do.

So what does the future hold? I think that what has happened since 2004 has been good for the investment world and for companies too, since the fact that investors discovered that they don’t understand what it’s all about has caused values to edge back to economic levels. At $8.60, ECI gives investors much more value than it did at the same price back in early 2004. Investors are slowly beginning to realize that the technology world is still in the process of being assimilated into the old world, and as I have no way of knowing when this process will be complete, I can only be grateful that there are such instruments like ETFs.

And what about ECI itself? Is this the time to buy, sell, or hold? I personally feel that it be worthwhile picking up if the price dips below $8. I have heard that the company has engaged an investment bank to look for a buyer, and if this is true then the price will definitely be upwards of $8.

ECIL 1-yr chart

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