Tuesday, November 8, 2011

Anite Half Year Trading Update

A super half year trading update from Anite today which can be read here and there is a more detailed write up on Anite in a previous blog post here. It looks highly likely that broker forecasts will have to be upgraded and this makes Anite an even more attractive stock to buy in order to play the growth in the smart phone market.

Investors would be advised to look at the previous post whilst interpreting the update, of which will summarise below.

Anite Half Year Trading Update

This is a first half update, which for Anite, runs to October. The year end is in April. The key point to note (re earlier post) is that Anite is typically a H2 weighted business. Handset revenues are the strongest growth driver at the moment, so the focus will be on this division.  Note that overall revenues declined from H2 to H1 (2010) last year and that handset revenues were flat.

 However, in this H1 Anite are telling us that revenues are up 60% from the same period last year. This implies a sequential movement in handset revenues from H2 to H1 (2011) of £28.9m to £32.9m, when last year this movement was flat. For H2, Anite are predicting that Handset testing revenues and operating profit will be similar to the first half. This may prove a outlook which is too cautionary.

Now, appreciating that Anite benefitted from in Q1 from a large order from one specific customer, there is still reason to expect that H2 will see its usual stronger performance. In this update, Anite confirmed that Q2 order intake was ‘very healthy’ and that since the last update in September the strong trends have continued. This is in line with what everyone else is saying in the smart phone industry.

Anite Analyst Upgrades

Indeed, knocking up some back of envelope assumptions demonstrates the potential for an upside re-rating here.

  • Conservatively assuming (in line with Anite)  that H2 handset sales are the same as H1 would give full year handset sales at £20.6*1.6*2=£65.94m
  • Last full year sales for Network Testing and Travel were a combined £44.15m

Combining the two, gives full year revenue of £110m when current analyst forecasts are for £103.3m. And, of course, this assumes no H2 bias for handset sales. It also assumes flat full year sales for Network Testing and Travel, even though it appears that Anite are bringing forward the period when ‘material’ sales in 4G testing are due to kick in, to ‘later in the year’ from previously in 2013.

Therefore, there is reasons to believe that Anite’s full year numbers will beat even the revised forecasts that the company is conservatively guiding analysts towards. Following this update,  95p is a reasonable price target.  

Sunday, November 6, 2011

Nice Systems Offers Recession Resistant Growth?

Nice Systems $NICE is a stock that benefits from increasing security and regularity compliance within financial services. They make the kind of surveillance and monitoring systems that the likes of UBS would have needed to make sure that a rogue trader like Kewku Adoboli might have been picked up early on in his activities. As such, Nice Systems primary profit driver is increasing regulation and awareness of ever complex needs to gather information from multiple sources, both internally and externally.

Nice Systems Equity Research

There is a detailed write up on Nice Systems in a previous post on Earnings View. The post is intended to analyze Nice Systems as a possible stock to buy in the light of recent results and guidance.

Turning back to the original post-referred to above- it’s clear that Nice Systems has done quite well this year.

Feb Guidance
Current Guidance
Mid-Point Change
Full Year Revenue
Full Year EPS

The numbers are nothing stellar but it is solid performance and the stock price has moved in a highly correlated manner to the S & P 500. In other words, the stock is flat. The recent earnings were quite good and the company raised guidance but analysts were left enquiring over the book to bill ratio for the third quarter and why it was below one. A number of reasons were given for this on the conference call, which are summarized below

  • Slower customer bookings in the third quarter, some of which were closed in the ongoing fourth quarter
  • Book to bill forecast to be much higher in the fourth quarter
  • Weakness in Q3 not seen in any product line or geography
  • Management explained that the book to bill was also had a pattern of being weaker in the third quarter in previous years, and that this was partly due to the increase in maintenance revenues and the way that business was conducted

All of which, is perfectly feasible but cannot allay particular fears about the macro economic uncertainty creeping into their order book. Moreover, as the share price is tracking the S & P 500, it is perhaps prudent to wait until they confirm a return to a string book to bill ratio in Q4.  That said, Nice Systems rival Verint $VRNT Inc raised full year revenue guidance growth to 9% from 8% in September.

Nice Systems and Verint Systems Recession Proof?

The odd thing about these two stocks, Nice Systems and Verint Systems is that they both increased net income and cash flow through the recession. This is to be understood, as their revenue drivers are relatively secular. However, with Nice Systems, there was a drop in revenues of 6.5% from 08-09 and gross profit fell by 10% However, Nice managed to only lose 7% in EBIT due to reduced SG & A expenses.

This suggests that Nice Systems is relatively recession proof but the problem is that a large amount of the company’s revenue comes from the financial services vertical. Unfortunately, if there is a Sovereign Debt Crisis induced slowdown then it is this sector and its suppliers that will get hit the hardest and, Nice Systems will not be immune from negative sentiment.

Nice Systems Stock Evaluation

No matter, even though the outlook does look uncertain and, investors will want to see the book to bill ratio improve in the next quarter, this stock is an intriguing one to follow for the potential to outperform when/if the Sovereign Debt fears subside. It is certainly not cheap on a PE basis but Nice Systems do generate consistently good free cash flow and as of September had nearly $600m in cash and equivalents on the balance sheet. Its an attractive stock to buy but, for now, its on monitor.

Friday, November 4, 2011

Anite Offers Exposure to Smart Phone Growth

A Smart Phone Stock to Buy

Anite is an interesting stock with which to play the growth in smart phones and next generation 4G LTE technologies. The stock is well placed for growth and is a very good candidate for investors looking to buy stocks for a GARP based portfolio.  Anite has two divisions, namely wireless testing and travel. The latter is an odd fit and will be discussed later, because the real excitement is with the wireless division.

A quick break down of historical six months revenue and adjusted segmental profits reveals the transformation in the business over the last couple of years. Firstly, starting with revenues…

Oct 09
Apr 10
Oct 10
Apr 11

…and then a breakdown of segmental adjusted operating profits…

Adj Op Profits
Oct 09
Apr 10
Oct 10
Apr 11

…and the shift towards profit growth coming from higher margin handset sales is clear to see.

Unlike UK listed Spirent SPT or US listed Ixia $XXIA, Anite provides software whilst the previous companies primarily provide hardware. This means that Anite has more operational leverage and the expansion in margins has indeed been impressive.

A Smart Phone Growth Stock

The handset division is seeing increasing growth from testing in next generation LTE smart phones and in September’s update Anite confirmed that LTE handsets made up 46% of total handset testing revenues, as opposed to 17% for the same period last year.  Qualcomm $QCOM gave results recently and whilst most of the attention was focused on the strong growth of 3G in emerging markets, Qualcomm was very optimistic on LTE as well…

‘And what we're seeing in terms of forward-looking mix is, I would say, tremendous growth in the mass-market smart phones around the world. You're seeing a lot of designing activity in those mass-market areas. We're also starting to see, I think, more penetration of LTE and the leading AP processor coming together.’

…and this market looks set to grow. The early cycle semiconductor companies like Aixtron, Samsung and Intel all affirmed that the strongest growth area for their businesses is in smart phone chip demand.

Moreover, turning to Anite’s Network Testing division, there is a similar trend developing. There is reason to believe that Anite are guiding towards an acceleration in demand here and its not clear if this is baked into analyst forecasts yet. For example, back at the full year results in June, Anite said…

‘Business activity levels in the second half of the year were at more normal levels.  The second half of the year also saw the first minor sales of LTE products in network testing, although levels are not expected to become material until 2013. ‘
…but at the September trading update, Anite implied that ‘material’ sales would now be in the year to April 2012…

‘The Network Testing business performed in line with expectations in the quarter.  The first sales of the Invex 4G benchmarking product were made in the period, although material sales are not expected until later in the year following planned investment in the first half to support the product development.’

So, the handset division is trading ‘significantly in excess; of last year and ahead of expectations and network testing sales appear set for early acceleration. Meanwhile, the Travel division appears to have stabilized with revenues focused on servicing a large client in TUI.

Anite Evaluation

With a stock price of 66.5p Anite trades on a market cap of £198m and has net cash of £9.1m on the balance sheet. Analyst forecasts are for adjusted EPS of 4.5p and 5.4 for 2011-12 respectively.  This would put Anite on a forward PE ratio of 14.7x and 12.3x respectively. This is hardly expensive when you consider that Anite is primarily a software company so much of that profit will be translated into free cash flow.

Indeed, Anite are expected to generate £4.2m and £7.8m in FCF for the next two years and, with mid teen’s earnings growth looking set for the next few years, the stock is undervalued. An evaluation closer to 90p is possibly better value.

In addition, UK peer Spirent has $227m in cash on its balance sheet and is looking to make acquisitions. Anite would be a very good fit. Watch this space.