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Monday, December 12, 2005


ORCT -- Bull Pennant in an Uptrend

Orckit Communications (ORCT) is an Israeli company that sells communications equipment internationally. Since transitioning to focus on "Triple Play" communications gear, which allows a service provider (i.e., telecomm or cable) to offer voice, data, and video together across networks, they've only had 1 main customer, KDDI in Japan. Here's a businessweek article discussing how the "Triple Play" is the big trend in the industry:

In July, ORCT fell from over $28 after guiding Q3 EPS to .23 vs. analyst estimates of .25. It broke its uptrend and subsequently drifted down to the 20 area ahead of the Q3 report. On 10/21, it broke 20 support and on 10/24 made a new low at 17.77. After a bounce, on Thursday, 10/27, ORCT broke that new 17.77 support, triggering stops and massive selling. Rumors circulated about them losing their one customer, Israel being attacked by Iran, or them missing EPS badly. On record volume of over 3.5 million shares, ORCT sold down as low as 12.22, $7 below the previous close. In retrospect, that was a climactic, capitulation panic selloff.

On Monday morning, 10/31, ORCT announced blowout earnings of .30 (excluding a one-time capital gain), well above what analysts had predicted before the selloff from over $28. In addition, they mentioned they had begun shipments to a U.S. telecom carrier, though no revenues were included in the Q3 report. Also, they upped Q4 guidance to .41 vs. .33 estimates, resulting in full year guidance of $1.11 (excluding the one-time gain). They upped 2006 guidance to $1.50, more than 35% growth over 2005. On the conference call, they indicated that these numbers were based only on existing customers, and any new customers would be addtional to these estimates. They also hinted at several potential new customers, particularly in Asia. Finally, they announced that they'd paid off all of their debt.

So ORCT dropped from $28+ down to $12.22 after disappointing guidance, and subsequently blew out the original estimates while mentioning a new U.S. customer (not yet formally announced separately nor reflected in earnings) and upping guidance significantly, yet the stock still sits under $24, almost 20% lower than before all of this improvement in fundamentals. With the capitulation selloff behind it and fundamentals pointing to a much higher price, ORCT looks like a tremendous bargain. Even a conservative 30 PE on 2006 earnings for the 35% growth would put ORCT at $45. Any new customers would increase those numbers. With a recent history of being very conservative on guidance and then blowing out estimates, ORCT has huge upside.

Many analysts from many firms were on the earnings call, but only one (RBC's Daniel Meron) had been covering it, with a $34 target. Recently, CE Unterberg Towbin initiated coverage with a Buy rating and a $30 target and the high-profile Oberweiss newsletter added ORCT as a Buy in its December issue.

Bull Pennant
After ORCT blew out earnings and upped guidance on 10/31, the stock consolidated in a bull flag pattern for a month before breaking out from that pattern at the begining of this month. Last week Monday, ORCT rallied to a high of $24.90, well above the upper Bollinger Band (22.64 at the time), so it spent the rest of the week consolidating the breakout in a bull pennant pattern.
You can find out more about flags and pennants here:

Currently, ORCT is poised for another rally after consolidating well within the Bollinger Bands. As of Friday, the upper Bollinger Band was continuing higher and stood at $24.55, allowing plenty of room for the stock to continue its climb higher. The 9-day EMA (Exponential Moving Average) should also act as support as ORCT trends up. A breakout from the bull pennant should mark the beginning of the next leg up. The Point & Figure chart points to a target of $41.50:,P.

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