Investment bank JP Morgan has launched coverage of Comverse Technology (Nasdaq:CMVT) with a Long-Term Buy rating and $31 price target, 33% above the market.

The investment house expects Comverse to remain profitable despite the current slowdown in revenue.

JP Morgan believes that Comverse is will maintain positive cash flow, and that even excluding its $1.8 billion cash, which generates financing income, there is no danger that the company will encounter an operating loss.

In sharp contrast, investment bank Merrill Lynch had recommended selling holdings in the company, suggesting a target price of $13 for the coming year.

The JP Morgan analysts, headed by Paul Coster, believe that Comverse is under priced at a $4.4 billion market cap, compared with similar companies.

The investment house believes that the company has growth opportunities in North America and Asia, and that this growth will come from its traditional voicemail products.

The company recently announced several contracts relating to these markets, including with Verizon Wireless (NYSE:VZ), AT&T Wireless Services (NYSE:AWE), and Telecom Italia (NYSE:TI).

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Comverse Network Systems generates 85% of Comverse Technology's revenue. Some 75% of CNS revenue is generated by voicemail products, which means that 66% of the revenue of Comverse Technology comes from voicemail.

The bank writes that Comverse has an opportunity to displace its rivals, such as Lucent Technologies (NYSE:LU) or Unisys, or to serve as the rivals own supplier. The analysts add that Comverse has the financial capabilities to offer better terms to its customers, and to finance R&D on a larger scale than its competitors.

Thus, in the first quarter of 2001, Comverse offered its customers 96 Days Sales Outstanding, 115 DSO in the second quarter, and 128 DSO in the third quarter of 2001. Only in the fourth quarter of 2002, do the analysts expect DSO to drop.

The analysts believe that the September 11 attacks on the United States had a positive effect on Comverse Infosys, which specializes in digital recordings. After revenue dropped over several quarters, Infosys has been experiencing stronger revenue since the attacks.

JP Morgan estimates that in 2001 the market in which Infosys operates came to $7.8 billion, and expects this market to rise by another 35% in 2002. Infosys' revenue came to over $30 million in the third quarter of 2001, and the analysts expect its 2002 sales will rise by 20%.

The bank is likewise encouraged by the deployment rate of 3G networks. JP Morgan believes that this will provide Comverse with a good opportunity to supply value added services, including multimedia and wireless instant messaging services.

The analysts write that unified messaging has yet to prove itself, but it is expected to gain more significant footing in 2002.

JP Morgan believes that Comverse will accelerate its growth at the end of 2002 or the beginning of 2003, at which point the general market conditions are expected to improve.