CIBC Oppenheimer's wireless analyst, Dale Pfau, reduced the price target of Alvarion (Nasdaq:ALVR) from $15 to $5.
With Alvarion selling for $2, it had to be done. Even if Pfau were to believe $10 to $15 a more appropriate price, the market conditions and the company's share price allow the target to be lowered, even if only to raise it down the line.
But Pfau didn't stop there. He also downgraded the broadband wireless access company from Strong Buy to Buy, which is something else altogether. Downgrades are rare, especially for a banking-oriented outfit like CIBC.
There's a world of difference between reducing a company's price target and downgrading its rating. And Pfau wasn't alone in cooling his sentiment towards Alvarion. Plenty of analysts found themselves bring dragged willy-nilly in the wake of investors.
Blurred lines of leadership
Alvarion doesn't stint on its efforts to charm investors. Its endeavors are led by three personalities: co-chief executives Zvi Slonimsky and Amnon Yacoby, and CFO Dafna Gruber. This creates problems.
First of all, the trio isn't putting out a unified message.
Second of all, the company's leadership is blurred. The distribution of labor between the joint CEOs is often discussed between management, investors and analysts. In discussions we held with analysts and investors, we couldn't find anybody who thoroughly understands this, and we were left scratching our heads too.
There are other companies led by workers dominating people, two chief executives or a powerful CEO and chairman. Albeit rare, the model can work, but the front the company presents to the capital market must be uniform.
Like everybody else, investors like things to be simple. In the case of long-term profitable growth companies, investors usually focus on financial relations.
When companies aren't making money, their burden of proof is more complicated. Then investors want to get into the technology or dynamics of the company's market. Also, more importance is associated with the company's management.
Companies losing money, or that consistently fail to meet expectations, have to work even harder at getting their message across. That includes a willingness to delve into details, but mainly ¿ to deliver a clear-cut, uniform message. Alvarion has some room for improvement in this respect.
The burden of proof
When we asked why the company is trading so low, Alvarion executives explained that investors think the wireless broadband access market is dead. As a leading company in that field, they said, Alvarion is being punished.
We'd expect a company that believes it's a market leader (justifiably, in our opinion) to also take the lead in creating investor sentiment. The company's marketing people are good at explaining to potential customers why the return on investing in Alvarion equipment is fast. They have excellent presentations that accomplish this goal.
The same cannot be said for the company's message to investors.
At the end of the second quarter, Alvarion raised expectations for the second half. If anything, it should have taken the opportunity to lower expectations, as Orbotech (Nasdaq:ORBK) did, for example. If you ask yourself why Orbotech stock gained so sharply last week, it¿s because the company did not release a revenue warning. So what if Orbotech lowered expectations by 40% against its peak quarter?
After Alvarion¿s revenue warning, just as the quarter closed, we were left befuddled as to the future. We may assume that in its third-quarter conference call, the company will substantially lower its forecasts for the fourth quarter. It should, if only in order to surprise investors for the better. Based on the company's current share price, investor expectations from the company are pretty dismal.
When summing up the upside, we see a leading point-to-multipoint company with a balance sheet steady as a rock. Meanwhile, its rivals are encumbered with real liquidity problems, which should bolster Alvarion's leading position in the future. We also see advantages in Alvarion's cautious cash management and in the flexibility of its business management. The merger bears excellent testimony to this: egos were put aside for the benefit of stable balance and advantages of scale.
On the downside, we see little grasp of managing investor relations.
If you believe in the upside, you can make the downside work in your favor. In a year and a half from today, if and when the fog dissipates and the company starts making a profit, even poor investor-relations management won't stop Alvarion's share price from changing drastically for the better.