Alvarion: The Timing is Right

Alvarion (ALVR) came out with earnings yesterday morning, May 5th, and according to the company, its first-quarter loss narrowed on markedly stronger sales. The company reported a net loss of $601,000, or 1 cent per share, compared with $623,000, or 1 cent per share, in the first quarter of 2007. (The per-share discrepancy is due to a higher number of outstanding shares compared with the same period last year).

Excluding discontinued operations, one-time costs and gains, the company earned $2 million, or 3 cents per share, compared with $1.3 million, or 2 cents per share, in the 2007 first quarter.

Sales reports, however, showed a very strong jump. The Tel Aviv, Israel-based company's quarterly sales jumped 29 percent to $67.2 million from $52.1 million in 2007. Cost of sales also rose to $34.3 million from $25.8 million last year, while operating expenses rose to $35 million from $30 million.

Alvarion also forecast second-quarter 2008 revenue of $67 million to $71 million and non-GAAP earnings of 0 to 4 cents a share from continuing operations. GAAP EPS are expected to range between a loss of 4 cents to 0 cents.

Analysts on average had been forecasting second-quarter EPS of 3 cents on revenue of $68.7 million, and this was an average of 12 analysts' estimates. For the full year 2009, analysts are expecting (again, on average) over $360 million in revenues, and EPS of nearly $0.50 per share. This reflects an annualized sales growth rate of over 24%.

Speaking about the outlook, ALVR's CEO, Tzvika Freidman said:

There are several factors increasing our confidence in the future. Bookings in the first quarter were strong and we see demand for WiMax growing, our strategy is working, we have a better position in the market and we have several important deal wins that will be reflected in our revenues in future quarters.

As mentioned, the company carries no debt on its balance sheet, and has over $97 million in cash available. We like the flexibility that a very conservative balance sheet offers.

Technical Analysis

The above chart shows Alvarion stock for the last six months. The stock bottomed in March, and has been making upward progress since then. Relative Strenght [RSI] and Moving Average Convergence / Divergence [MACD] stochastic lines are both positive, and we think the timing is right for a long call spread on this name. We would also buy the stock here.

Investment Recommendation

1) Go long on ALVR stock at present levels, roughly $7.50 per share, and; 2) Purchase a September 2008 $7.50 call on ALVR and sell the September 2008 $10 strike price call.

Current prices indicate that buying the ALVR Sept $7.50 Call ($1.00 at present) and selling the ALVR Sept $10.00 call ($0.25 at present) would result in a net cost to investors of approximately $0.75, or $75 per spread. With ALVR presently trading at $7.40 investors are nearly at the money with the lower priced calls. The break-even point on this spread is approximately $8.25 per share on the stock (calculated as the strike price of the lower priced calls ($7.50) plus the net cost of $0.75 for the spread).

Investors will have just about five months months (until expiration on September 20th, 2008) to realize these levels if purchase of the spread occurs on Monday, May 5, 2008. We would look to exit this call spread at a price point of $2.25 or greater. This means that if you can sell the $7.50 call and buy back the $10 call in the near future for a total price of $2.25, or $225 per spread, we would exit the trade. This ‘trigger’ order can be entered with your broker.

Please note: Options trades all involve a high degree of risk and the potential to lose some or all of your investment. These recommendations are general in nature, and you should consult your own financial professional who is familiar with your situation as to the appropriateness of these trade ideas.

Disclosure: Analyst has no position in ALVR stock or ALVR options.

Comments

[Alpha Seeker]

This is a bullshit stock with no dividends or future earning power. I have friends in the business, and most of the people who would reccomend this stock are purely PRing and BSing you.
Never play the Isreali stock market from the US, because you have no clue what works there.

[ChandlerLutz]

Interesting article...but I feel management may be a little misleading. I really dislike it when management repeatedly adjusts earnings for one time charges. These sort of things should only occur for a large acquisition or divestiture.

I am also quite unfamiliar with the business here...and wimax, well I barely know what that means. Already it sounds like trouble to me...