Cherchez le CEO
The NICE Systems story shows that management changes in a crisis-ridden company are a signal to watch for.
As you know, I have been an investor in Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) since the end of the 1980s and I held onto them even when the man because of whom I invested in Teva to start with, Eli Hurvitz, stepped down. Why didn’t I sell? Because I knew his replacement very well and he fitted the job like a hand to a glove. In recent years, I have taken notice of several Israeli managers who show the kind of greatness that Eli Hurvitz did. The managers I name below certainly demonstrate a level of management the likes of which I have not seen in the past in Israel. So it’s worth sitting on the stocks of companies run by such managers for the long-term. As a rule, I advise you to read the chairman or president’s letter to shareholders that accompanies every annual financial report.
The people I refer to are NICE Systems (Nasdaq: NICE; TASE: NICE) CEO Haim Shani, whose company has been recommended by nearly every analyst and expert around; Alon Israel Fuel CEO David Wiessman; Elbit Medical Imaging (Nasdaq: EMITF; TASE: EMIT) chairman Mordechai (Motti) Zisser; M-Systems Flash Disk Pioneers (Nasdaq: FLSH) president and CEO Dov Moran and Chaim Katzman of Equity One Inc. (NYSE: EQY) of the Gazit-Globe (TASE: GLOB) group.
Today I will look at NICE. The NICE of 2006 is exactly the same company that Haim Shani took over five years ago with a few repairs that he made. Has there been any fundamental change since then? The company is operating in the same fields and the same markets, but today it is thriving. Haim Shani is the difference between the mess of 2001-2002 and today. I took NICE as an example because the case there is so obvious and easy to prove.
Some people claim Haim Shani was simply lucky and that the previous management was brought down by the global crisis at the turn of the century. Haim Shani merely came in and rode the subsequent global recovery. This is incorrect. NICE began to decline immediately following the departure of its founder Didi Arazi, a great manager in his own right. Arazi knew only too well what the demands of tomorrow’s world were and led the company he founded with amazing skill. He then abruptly quit and went off to enjoy life (as he is entitled to do) but once he had gone, the company began to falter, because of its management and not the market. The downslide actually began while times were still good and it continued until Shani came along, regardless of the economic turmoil that was taking place. NICE, therefore, is a classic test-case for management performance.
Haim Shani was previously at Applied Materials and left in 2001 to join NICE just as the company was running into serious problems and the board was looking for someone to the get the ship afloat again. He introduced a long-term strategy, and in the review he attached to the company’s 2001 reports, he noted that the tools at the company’s disposal at the beginning of 2001 were the same as those it had at the end of 2001. These were “an excellent technology and products, a strong blue-chip customer base, an outstanding team of people, and prestigious strategic partners. In addition, our competitive position was improved by strengthening our management team, creating a more appropriate organizational structure, leveraging our professional services capability, lowering our expense profile and improving our working capital management.”
Shani didn’t stop there. “In retrospect, perhaps the most important decision was moving aggressively on all fronts to make necessary changes as quickly as possible, even though the disruption could hurt our short term results. After reporting a substantial loss in the first quarter, we snapped back quickly and made a significant improvement in each subsequent quarter.” Any analyst or investor who bothered to read what Shani wrote and then looked at what happened in 2001 and how the situation began to point towards substantial change and then did the same thing in 2002 would conclude that this was a stock worth investing in heavily, not so much because of the turnaround but more because the person in charge was a man who could deliver.
In 2001 Shani also founded the “Security Group” since, as he noted in his review, business in the security sector was set to pass the $1billion mark. When I read this, I was very sorry I hadn’t read it back in 2002, as I have no doubt that I would have bought the stock, just as I strongly recommend Elbit Systems (Nasdaq: ESLT; TASE: ESLT) today.
In April 2003, after the publication of the report for 2002, the stock price was still only $13, even after rising 50% from the low of October 2002. By the middle of 2003, it had risen to $15-16 and then to $25 by the end of the year. 2003 marked NICE’s “switch to profit” and here again I draw attention to the concluding financial reports for 2003, published around April 2004. Anyone who reads them will notice two things immediately. The first is that all the goals mentioned in 2001 were achieved in 2002, which shows credibility. The second is the optimism about the future. At this stage, serious investors were already beginning to enter the stock.
At that time, I already questioned why NICE was lagging so far behind Verint Systems (Nasdaq: VRNT) in terms of market cap. It would appear that I was still affected by past fears and that I wasn’t as confident about the management as I am today. During the period April - October 2004, NICE fell 20% to $19 a share. It then went up and has continued to do so ever since, reaching a price of $55, a 175% increase on the fourth quarter of 2004.
The case of NICE teaches me several important things that we would do well to remember. First of all, when a company management team is replaced and a manager with a record like that of Haim Shani is appointed, investors must start following developments, quarter by quarter. NICE is a classic case, since from the time that Shani took over, the success in meeting company goals was clearly evident quarter after quarter. Secondly, investors must realize that if a company operates in a growth area, and has the right team under competent management, the chances of success for its shares will rise substantially. Thirdly, after 4-5 years of processes such as these which place the ability of company and management beyond question, the chances of losses will gradually decrease.
In the case of NICE, the only instance in which investors could lose money would be a temporary crisis in the entire market or other factors which neither investor nor management could predict upfront. Therefore, NICE is one the best investments a solid investor could make. The analysts are now rushing to revise upwards their forecasts for the stock, and it would appear from the latest updates that the consensus will be earnings per share of $2.05 in 2006 and $2.5 in 2007. The stock’s current price - $55- is therefore reasonable, providing the investment is made on a long-term basis. In the interests of fair disclosure, I will state that I hold NICE and stocks of other companies that I referred to as having outstanding managers.
Published by Globes [online], Israel business news - www.globes.co.il - on May 4, 2006 http://www.globes.co.il/serveen/globes/docview.asp?did=1000088345&fid=1052