Amdocs and SanDisk: Why I Disagree With UBS' Cooler Ratings

Of the big Israeli companies reporting second quarter results this week after the bell, Amdocs Ltd. (DOX) will be reporting on Wednesday, followed on Thursday by SanDisk Corporation (SNDK).

Both companies are in my portfolio. SanDisk has gained almost 12% since the beginning of the month, and 28% since the beginning of the year. Yesterday, UBS cooled on SanDisk slightly when it downgraded its rating for the company to "Neutral" from "Buy," although it nevertheless raised its target price to $60 from $53.

UBS said in its review that it expects “encouraging” second quarter results and second half estimate revisions based on improving NAND demand, but added that those factors are already reflected in current valuation levels. It also said that the risk of new capacity additions in the NAND market, and DRAM conversion to NAND, “remains a significant risk factor."

The UBS review contained not a single world about Apple Inc. (AAPL) which, I feel, is the "wildcard" of the entire NAND market. No one can estimate the intensity of the demand it will bring to the market next year. There are rumors of an upgrade of its entire product line, from handsets to media players and computers, all of which will be based heavily on NAND chips. The iPod video player for example, will come with a touchpad like that of the iPhone, and at least 16Gb in flash-based storage capacity - a sure hit, if and when it hits the market.

In contrast to the slightly chilly review that SanDisk got yesterday from UBS, Citigroup continues to warm it up. As they see it, last Friday's results from Samsung Electronics Co. Ltd., and Micron Technology's (MU) analyst conference the day before, merely reiterates their view that the NAND chip market is not about to undergo a downturn in prices in the coming quarters. They even claim that Samsung hinted, in its conference call last Friday, at a possible shortfall more acute even that the previous one in the third quarter of 2005. Back then, this shortfall was known as the "nano effect," because the launch of the first series of flash-based iPod players. That shortage, it will be recalled, sent SanDisk up to a high of almost $80 in January 2006.

Amdocs' Upgraded Future

In contrast to SanDisk, Amdocs's stock has "fallen asleep," with a negligible return both last month and since the beginning of the year. In actual fact, it has struggled to cross the $40 mark ever since it reached it back in September. There are those who will, no doubt, recall its long and tortuous "flirt" at $30. Goldman Sachs is the hottest of all the investment houses on Amdocs. It has rated it "Buy" with a target price of $47, and has also added it to its prestigious "Conviction List" alongside names such as Cisco Systems Inc. (CSCO), Google Inc. (GOOG), and SanDisk as well.

One of the mega projects that Amdocs has been carrying out in recent months is the conversion of Sprint Nextel Corp's (S) subscriber billing software from the platform of a rival company (used by Sprint prior to its merger) to its own. The high level of costs and harm to its results that Amdocs has incurred during this conversion are temporary, since it will only receive revenue on the billing processing of all these subscribers, once the conversion is complete.

According to Goldman Sachs, Amdocs had converted 33 million subscribers by the end of June, with a further 20 million to be converted by the end of November this year. They therefore believe that 2008 will be a much better year for the company, since its costs will fall as the conversion nears completion. According to their calculations, the conversion, coupled with the natural growth in Sprint Nextel's subscriber base will contribute an additional $130-140 million to Amdocs' billing processing sales in its 2008 fiscal year, which begins in October 2007.

Goldman Sachs' enthusiasm for Amdocs is not limited solely to its Sprint Nextel contract. They also see potential upside in the coming quarters from the world's largest telephone company in terms of market cap, AT&T Inc. (T), chiefly through its cellular arm. In addition, AT&T has just announced its acquisition of a small telephone company named Dobson Communications Corp. (DCEL), and this represents yet more potential billing work for Amdocs at the expense of its rival Convergys Corp. (CVG), which will lose Dobson. Above all, Goldman Sachs expects Amdocs to gain a large market share in the billing sector through contracts with cellular communications giant Vodaphone Group plc. (VOD).

Disclosure: Author is long DOX and SNDK.

DOX 1-yr chart:

SNDK 1-yr chart:

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.