Two Likely Small Growth Winners

02/13/2008 12:00 am EST

Focus:

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, editor of Growth Report, finds two smaller technology stocks that should offer good growth prospects in the years ahead.

Ness Technologies (NASDAQ: NSTC), a global provider of IT services and solutions [based in Israel, provides outsourcing, system integration and application development, software and consulting, and quality assurance and training in Israel, North America, Europe, and Asia].

Quarterly revenues were up 29% year over year, while 2007 revenues were a record $562.3 million, up 19%. GAAP net income was $10.1 million [for 2007], and diluted net earnings per share were 26 cents. Backlog as of December 31, 2007 was a record $734 million, up 21% [over] December 31, 2006.

NSTC also issued [future earnings] guidance. For the full year 2008, Ness expects to generate revenues of $635 million to $655 million and diluted net earnings of $1.00 to $1.05 per share.

Overall, this was a great quarter for the company. They beat non-GAAP earnings estimates by a penny a share and increased their backlog. More importantly the company’s 2008 guidance indicates they do not see a slowdown in their business.

Fundamentally, this stock is cheap. Even after we take into account future share dilution, the stock still looks cheap. One area of concern is that revenue growth is slowing, but for the time being, it is not a major concern. Currently, the stock trades [slightly below $10], just nine times forward EPS. Look for this stock to climb higher this year as the market recovers. We maintain our target price of $16.50 based on a forward PE of 14x [projected 2009 earnings of $1.18 a share].

Dawson Geophysical (NASDAQ: DWSN), based in Midland, Texas, provides [two-dimensional and three-dimensional seismic data for oil and gas companies].

Revenues for the first quarter [of fiscal 2008] ending December 31, 2007 were $77.6 million, an increase of 45% over the same quarter in fiscal 2007. Net income for the quarter was $7.7 million (or $1.01 per share), compared with $5.4 million (72 cents a share) in the same quarter of fiscal 2007—an increase of 42%. The company had no new outlook for the year.

The revenue growth was impressive, but the company missed on earnings. Growth prospects remain strong and we like the space in which Dawson operates. Dawson currently trades [below $55], which is only 12x the current earnings estimate of $4.47 per share. Any US slowdown should not affect Dawson’s business, and as a result companies like Dawson deserve premiums. Our target price of $95.00 results in a forward P/E of 20x [projected earnings of $4.65 in the fiscal year ending September 2009.]

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