Yesterday, Comverse Technology
The company reacted quickly and effectively to the downturn in the telecommunications sector. Revenues fell 42% to $736 million in 2002, as customers such as Verizon Communications
In addition, Comverse aggressively managed costs as revenues fell, cutting R&D and SG&A costs by over 20%. The company's balance sheet is also in great shape, with little debt and $2.2 billion in cash and short-term investments.
All signs point to a turnaround. With cash on hand for continued acquisitions, a streamlined cost structure, and an upturn in revenues, the company is poised for a solid year in 2004.
But the stock market has gotten ahead of itself on Comverse. After doubling in the last 12 months, the stock is now pricey, trading at an enterprise-value-to-revenue ratio of 2.9.
The expectations for future cash flows implied in the stock's current valuation are overly optimistic. The company's core division, which contributes 65% of sales, is in a rapidly maturing market with products such as voice messaging and call answering software. While sales at Verint
In addition to facing challenges to grow the top line, Comverse will see increased pressure on margins. As the recent acquisition of AT&T Wireless
While Comverse has demonstrated its operational excellence in returning to profitability so quickly after the meltdown in its industry, current valuation metrics reflect expectations that are unlikely to be met. It's a great turnaround story -- just not a great investment opportunity.
Want to uncover some great small-cap investment ideas? Take a free, 30-day trial to Tom's Gardner's Motley Fool Hidden Gems .
Motley Fool Contributor Salim Haji does not own shares in any of the companies mentioned.