Gmul Sahar analyst Doron Tsur today reiterated his Buy recommendation for

Formula Systems

(Nasdaq:FORTY), and price target of NIS 140.

Tsur also took the opportunity to upgrade Formula subsidiary

Magic Software Enterprises

(Nasdaq:MGIC) to Speculative Buy, based mainly on its recent dive. Formula's target is 20% above its market price. Magic's target at $6 is 115% above its market price.

New rules of reporting subsequent to the enactment of the dual-listing law have substantially reduced the amount of information contained in the companies' financial statements, making them harder to analyze, Tsur notes.

Tsur says that the enormous amount of media attention to Formula tends to distract, and the important thing is to focus on the performance of the group members. As opposed to the general impression that poor performance by Magic has been dragging the Formula group down Tsur says, in fact most of the group members haven't been doing well.

The group's statement shows that its privately-held companies, for which no specific financial statements are available, lost an aggregate $1.5 million in the fourth quarter of 2000, compared with earning $250,000 in the fourth quarter of 1999.

Software profits had to drop after the Y2K boom, he says. But the main problem of software companies is that during the bug-boom, as demand for programmers exploded, so did their salaries. But the companies couldn't charge customers commensurately more. Gross profit margins in the software industry declined from 25% to 14%, Tsur calculates, and operating profits shrank from 15% to 3%, because of the profligate paychecks.

Moreover, when the demand for quick software fixes diminished, the companies found it difficult to adjust pay downwards.

Formula is developing a major other assets item, which will hurt the company's results in the future when it has to reduce it, whether over time or in one blow.

In his recommendation for Magic, Tsur writes that the company is in the process of restructuring. He doesn't hazard a guess as to whether it will work. Tsur says that the company's success rides largely on its new V-9 version now hitting the market. Magic is high risk, but its share is so low that if its reorganization succeeds, risk-loving investors will do well indeed. Of course, if it fails, the company will continue to burn cash and decline together with its share price.