NDS: An Excellent Long-Term Investment

NDS (NNDS) is a stock that one should hold into the next decade, adding a few shares to the portfolio every time the stock falls for reasons that have nothing to with value. Under the terms of the agreement signed at the end of last week between Rupert Murdoch’s News Corp. (NWS) and Dr. John Malone’s Liberty Media Capital (LCAPA), the former will transfer control over DIRECTV Group Inc. (DTV) to Liberty together with several other assets. In all, $11 billion worth of assets will be transferred in exchange for 16.8% of News Corp., which Malone picked up during the 1990s, and which was a thorn in the side of Rupert Murdoch.

What connection does NDS have to all this? It was dragged into the earlier mega-battle over satellite television between News Corp., Vivendi, and Charlie Ergen’s EchoStar Communications Corp. (DISH). During that spat, Vivendi and Echostar used NDS to get at Murdoch and rained down a welter of lawsuits against the Israeli-British company. The investors’ usual (and justified) fear of anything that makes legal headlines sent NDS down to $4 and even lower within nine months. It fell from $25 in February 2002 to less than $4. This was in any case the period of the big stock market slump, but NDS had an exceptionally tough time of it with the deluge of lawsuits it was hit with during the all-out war for control of satellite television.

I visited NDS at that time and what I saw was a company with outstanding performance in all key areas, from technology to niche products. I was particularly impressed by the company’s management. There’s not much that I can say about company chairman and CEO Abe Peled that hasn’t been said before. He is one of the leading managers on the Israeli scene, and he is also a member of the News Corp. representative board. He founded NDS after working at IBM (IBM) from 1973 to 1994, reaching the rank of VP of software and global development. Peled works with COO Raffi Kesten, whom he brought to the company in 1996. You don’t meet people of this caliber every day, and after touring the company back in 2002, I arrived at the conclusion that the stock’s fall originated in Wall Street rather than Main Street. I and many other colleagues entered NDS as long-term investors and since then I have written on many occasions that NDS is one of those companies worth hanging on to into the next decade, and the decade after that.

I have good reason for praising NDS the way I do. The company’s management has proved its worth in the battle for market share, and continues to demonstrate its ability with every important new niche it enters. The fact that NDS is expanding its activity is certainly important, but I am referring here to another achievement: the company’s ability to take considerable chunks out of markets controlled by big companies. The company’s rapid growth is the best proof, if any were needed, of its achievements.

Back then, NDS competed with two giants, Motorola Inc. (MOT) and Scientific Atlanta, which was later acquired by Cisco Systems Inc. (CSCO), in the market for set-top boxes. I wrote at the time that taking on these two giants was no mean feat. Later on, as Pay-TV technology expanded, NDS went further, competing with a wide range of companies including DIRECTV. If you look at the figures today and compare them with those at the turn of the century, you’ll understand what I mean. According to the analysts, NDS will have sales of $672 million this year (its fiscal year ends on June 30), and $724-818 million in sales in 2007. Note that the company ended 2004 with sales of $399 million, which means it will double its sales within four years. NDS posted a net profit of $38 million in 2004 and will post a profit of $110 million for 2006.

While it cannot be denied that much of NDS’s strength is thanks to the strong backing from News Corp., which holds 80% of the company, its progress and rate of contract wins shows that NDS’s dependence on its parent is now less than it was. Rumors from overseas claim that DIRECTV will replace NDS as its supplier of interactive television and Pay-TV with another company, since News Corp forced DIRECTV to bring in NDS in place of TiVo Inc. (TIVO).

Some analysts could be influenced by such a prospect, since DIRECTV is one of NDS’s key customers, so I thought it would be advisable to draw your attention to this. If the stock does indeed suffer as a result, this would be another opportunity to buy shares or increase positions. This is, of course, my personal opinion, and you will make your own decisions, but I stand by my view unreservedly.

NNDS 1-year chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.