Amdocs and Comverse: A Marriage Made in Heaven?

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Includes: CMVT, DOX
by: Shlomo Greenberg

Amdocs (NYSE:DOX) appears to be a favorite with Merrill Lynch. While the future of stocks such as AudioCodes (NASDAQ:AUDC) or Alvarion (NASDAQ:ALVR) is still contingent on developments in their niches, Amdocs operates in an enormous, vibrant, rapidly-growing niche in which it has become the leader. If anyone could guarantee that Alvarion and Audiocodes’ niches will develop along similar lines and that they too will become leaders, I would sell all my holdings in Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) and even my home and put it all into these two stocks. But that, of course, has yet to happen.

Amdocs ended its fiscal year for 2003-04 (its year ends in September) with sales of $1.77 billion and profit of $235 million. It is likely to end fiscal 2006 with sales of $2.9 billion and profit of $444 million, and, according to consensus estimates, will end fiscal 2007 with sales of $3.3 billion and profit of $510 million. Like its smaller colleagues AudioCodes and Alvarion, Amdocs also made an impressive comeback from the slump in 2002, rising from $6 to $30 in Q1 2004, a fivefold increase. At the end of 2004, the stock went down together with the rest of the market to $18, and has since climbed back to its current price of $36. This means that it has already passed its 2004 high.

The fact that Amdocs is currently above its 2004 high while AudioCodes and Alvarion are below theirs indicates the confidence its investors have in it. Tal Liani and his associates at Merrill Lynch have given Amdocs a target price of $43, 13% higher that its current price. Liani also predicts that the new AT&T (following the merger with Bell South) will give Amdocs its customer care business, a move that sounds logical to me. Overall, Amdocs appears to be the world’s leading customer care and billing services subcontractor.

Amdocs has a Siamese twin, in terms of behavior, by the name of Comverse Technology (NASDAQ:CMVT). As I have said repeatedly in this column, I cannot fathom, especially now, what is stopping Amdocs and Comverse from merging, since this looks like a match made in heaven. Perhaps all that is missing is an adroit investment banker who would be able to convince the two companies that they both stand to gain from such a merger.

Comverse also climbed back from the crisis of 2002, rising from $6.6 to a high of $29.6 in March 2006. But then there was the Koby Alexander affair, which caused a change in direction -- albeit temporary, in my view. This has cost Comverse investors one quarter of the value of this asset. Comverse, whose fiscal year ends on January 31, ended 2003 with sales of $766 million and a loss of $5 million (down from a loss of $130 million a year earlier). It will end 2006 with sales of $1.6 billion and profit of $176 million -- a most impressive feat. Both companies have plenty of cash -- Comverse has $2.35 billion and Amdocs has $1 billion. But while Amdocs has five analysts who recommend holding its stock and 15 who recommend buying it, Comverse has three analysts who recommend selling its stock, 11 recommend holding and 10 recommend buying it.

Yet despite all this, from the end of 2002 through March 2006, the graphs for both stocks moved in lock-step. This would imply the gap that has opened since March is an “Alexander” gap and has nothing to do with the real world outside Wall Street. Comverse fell 41% from March to mid-July, and has made a gradual rally ever since. It is currently suffering from the same problem that Teva has -- uncertainty as to its future leadership. Speaking frankly, with things as they are present, I prefer Comverse to Amdocs (not that I think Amdocs is not a good buy, obviously), since the gap between Main Street and Wall Street is continuing to widen. I believe others have seen what Amdocs perhaps has not seen, and they believe that an acquisition offer is in the pipeline. I also believe Comverse is in the process of bringing in a better company board, and would remind everyone that it managed to enter a unique telecommunications infrastructure upgrade niche. Lastly, Amdocs is valued at double the sum of Comverse, and there is no justification for this, whichever way you look at it. I believe that when the two graphs come close to each other again, it will not be because Amdocs has gone down, but because Comverse has gone up.

Amdocs 1-year chart:

Comverse 1-year chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007. Republished on Seeking Alpha with full permission.