CIBC sees technology growth in second half

Analyst points to in-line transitional period that helps set up a stronger second half.

By SUSAN LERNER
April 18, 2006 22:07
2 minute read.
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Israeli technology stocks are poised for accelerated growth in the second half of 2006 following a "transitional" start to the year, CIBC World Markets said Monday as it previewed first quarter results for the sector. "For many of our Israeli names, the first quarter of 2006 is likely to be an in-line transitional period that helps set up a stronger second half," analyst Shaul Eyal wrote in a research note. Eyal said this pattern creates a good opportunity for long-term investors to quietly build strong positions in some of those names such as AudioCodes and Shamir Optical, though he thinks others, such as Given Imaging may offer better entry points down the road. "AudioCodes, Shamir and ECtel have spent the last few months preparing for a second half acceleration," the analyst said. AudioCodes, he said, will probably report "humdrum" first and second quarter results given its effort to expand its OEM (original equipment manufacturer) channel relationships but he expects recently planted growth drivers to start to kick in noticeably in the second half. "Current estimates do not reflect the upside potential, in our view," he told clients. Shamir Optical, he added, is in a similar situation. Although CIBC thinks investors may be wary of management's "rosy" second half outlook because the company missed guidance last year, the firm believes Shamir's French operation is set to deliver strong yearover-year growth starting late in the second quarter. ECtel was also seen as strong. Eyal said the company's acquisition of rival revenue assurance vender Telesoft early in the year followed by a significant master agreement with a tier-one US wireless provider could lead to a significant upturn in the second half. His expectations for the first quarter, however, are relatively modest as he expects upside potential will likely be capped by "typical seasonality" and the Telesoft integration. As for Given, Eyal said he remains upbeat about longterm growth that could come from new product introductions and broader reimbursement coverage but that the next few quarters are likely to remain challenging. CIBC's top pick for the first quarter, however, is DSP Group. "Having entered '06 with all-time high visibility and backlog, we believe DSP is poised to continue nudging its forecasts northward," the firm said. It expects the key driver to be accelerating penetration into Europe and Japan, and that next generation products could be "a cherry on top." Setting a positive backdrop for the call is a waning perception of country risk for Israel given the lack of significant impact on local stocks from a series of unsettling news items over the past few months, including Ariel Sharon's stroke and Iran's nuclear ambitions. "Not so this time around. Over the last few years, institutional investors have clearly reevaluated Israel's country-specific risks and concluded that they are not so fundamentally different than those of other developed nations," CIBC concluded.

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