Three Ways to Invest in Israeli Security Solutions

Allot has been made out of the various technologies that have come out of Israel. With Israel at the forefront of the war on terror for decades, security solutions to help combat terrorism have always been highly sought after.

Many of the technologies, which were created with defense uses in mind, have worked their way down, and now also have a consumer application. There is no doubt that Israel has produced some of the best security technologies in the market today, and, as such, there are many attractive investment opportunities in this field.

I would like to highlight three:

Nice Systems (NICE) is a security company that specializes in two markets: Security and Call Centers. Its security solution empowers security personnel to detect, prevent, and respond to threats in real-time. It also allows them to investigate, and reconstruct criminal and security cases using video surveillance and control services, incident monitoring, and reconstruction solutions. NICE is the market leader in providing fast and efficient solutions for the capture, storage, retrieval and analysis of customer interactions for contact centers, and the enterprise.

In the most recent quarter, revenues increased 33% over Q1 2006. Operating margins in the first quarter were 15.0%, compared with 10.5%, in the first quarter of 2006. The company expects strong growth going forward, and, as an added surprise, if the U.S. Dollar continues its recent strengthening against the Israeli shekel, the company’s expenses should fall significantly, thereby improving its bottom line.

Verint Systems (VRNT) is a leading provider of analytic software-based solutions for security, and workforce-enterprise optimization. Its solution generates actionable intelligence through the collection, retention, and analysis of various communication networks. As a subsidiary of Comverse Technology (CMVT), which has been embroiled in scandal, the stock has underperformed its peer group, and is trading at compelling valuation. It is on many short-lists as a potential takeover candidate.

ECtel (ECTX), as I posted a few days ago, provides fraud management solutions in the telecom industry. The company did unnerve investors with a weaker than expected quarter, but with the growing demand for its solution, they look to get back on track in the second half of the year. In addition, Hewlett-Packard (HPQ) has had little success breaking into this field, and with Hewlett-Packard’s affinity for buying Israeli companies, this could be a M&A target as well.

Disclosure: Author’s fund is long NICE, and VRNT.PK as of June 7, 2007. He does not hold positions in the other companies listed.

VRNT vs ECTX vs NICE 1-yr chart

Comments

[Ralph F]

Isn't most of NICE's business call center software, not security solutions? Verint and Ectel may be more focused bets on security related software and services.

[aaronkatsman]

About 25% of NICE revenue is coming from Security, and that number shoud increase. They will be major players in the '08 Beijing Olmpics.