The upgrade stands out against investment banks' conservative recommendations for technology stocks. Comverse itself has been downgraded by Merrill Lynch, which recommended investors sell the share after the company published its Q3 2001 results.
JP Morgan explained that the share price reflects an earnings multiple of just 29, while other companies in the sector trade at an multiple of 39 on average, which means that Comverse is undervalued.
The bank bases teh upgrade on the company's market position, experienced management, wide product range, large customer base, and sufficient resources in order to survive the weakness in the global telecom market.
In order to prove that Comverse is underpriced, the bank neutralizes this year's revenue forecasts for Ulticom (Nasdaq:ULCM) and Verint Systems (formerly Comverse Infosys) from the $1.1 billion revenue Comverse is expected to post in 2002. Based on this calculation, subsidiary Comverse Network Systems is expected to post $893 million in 2002.
A similar method is used for evaluating CNS. The bank deducts the valuations of Ulticom, $96 million, and Verint's estimated value of $314 million from the Comverse value, $2.2 billion. While Verint has filed a prospectus ahead of its IPO, the prospectus does not include a valuation, estimated at $200 million to $300 million.
Thus, CNS is expected to post $893 million revenue in 2002, and is valued at $1.8 billion.