ECI Telecom: Wait on the Sidelines

 |  Includes: ALU, ECIL, NT
by: Shlomo Greenberg

This week I received a review by RBC Capital Markets analyst Daniel Meron on ECI Telecom Ltd. (ECIL). Meron downgraded the veteran company to "Sector Perform" from "Outperform." I'll come back to Meron's rating in a moment, but first a few words about the company and its stock.

ECI joined the other tech stocks in the recovery that started at the end of 2002, staging an admirable rally from $1.25 in October 2002, to $9 in January 2004. Save for a short wave of excitement in the second quarter of 2006, following excellent quarterly results and expectations of more to follow that sent the stock up to $11.45, it has held steady for the last four years at $8-9. It turns out that this stock, which has probably not given its investors much cause for joy, has fared better over the last five years than other companies in the telecommunications infrastructure sector such as Alcatel-Lucent (NYSE:ALU), and Nortel Networks (NT).

In his update on the company, Meron says that for now he prefers to sit on the sidelines and not enter the stock, while he "waits for fundamental triggers to emerge." In ordinary language, what he is saying is that the company's position is neither good nor bad.

ECI's optical equipment division, which accounts for 61% of sales, is the only unit which is presently growing, but it is not enough to lift the company into double digit growth. Laurel, the acquisition that the company made last year and Veraz Networks Inc. (VRAZ), still do not amount to a growth factor. A lot will depend on broadband orders from Deutsche Telekom AG (DT), but nothing is moving here for the time being.

Meron has given ECI a target price of $9, a figure that matches his current sentiment about the company. Veraz had an extremely negative effect on ECI on Wall Street, due to the initial high expectations of the company. This will change if Veraz starts posting profits. I feel that investors find the range of divisions within ECI a bit off-putting, since they want to see more focus. That said, it should be remembered that whatever is holding back growth at present could turn into a major growth engine in the not-too-distant future. So Meron's conclusion is the right one for now - wait on the sidelines.

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.