Investment bank JP Morgan has upgraded Comverse Technology (Nasdaq:CMVT) to a Buy rating, setting a $31 price target, 82% above market.

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.

The bank said that all the Comverse divisions are priced at a sales multiple of 2x, which is further proof of Comverse being undervalued.

The bank said that despite the weak market and the drop in telecoms capital expenditure, Comverse has managed to maintain profitability and is expected to continue posting growth in earnings per share, even if revenue drops. With this drop in mind, the bank estimates that the company will cut operating expenses 7% in Q4 2001 and another 8% in the first quarter of this year.

The bank doesn't say if the company will have to take tough measures, such as lay-offs, in order to meet the forecast.