Pricey Tech Companies Cheap to Chardan Capital: Israel Overnight

The most expensive Israeli technology companies on record remain cheap to Chardan Capital Markets LLC and Oppenheimer & Co., which predict shares will extend gains as an improving U.S. economy boosts product demand.

Mellanox Technologies Ltd. (MLNX), an Israeli adapter maker, rose to a record yesterday, pushing valuations to nearly double that of the average company on the Nasdaq Composite Index. Gains by Allot Communications Ltd. (ALLT), the Israeli maker of networking equipment, sent reported earnings multiples to two and a half times that of the gauge. The Bloomberg Israel-US Equity Index (ISRA25BN) of the largest Israel companies traded in New York was little changed at 90.06 yesterday, a five-month high. In Israel, the TA-25 Index fell 0.3 percent at the 4:30 p.m. close in Tel Aviv.

The best six months of job growth in the U.S. since 2006 has helped keep consumer confidence in the world’s biggest economy near the highest level in a year, benefiting Israeli technology developers as demand for products with faster data transfer systems and greater storage buoys the market, according to Chardan Capital. Global Internet traffic jumped eightfold over the past five years, and will rise fourfold by the end of 2015, according to Cisco Systems Inc. (CSCO)

“The optimism is driving these valuations to still be viewed as cheap,” Jay Srivatsa, the managing director of equity research at Chardan Capital, said by phone in New York yesterday. “Investors are looking at some of the numbers and giving higher multiples because they believe the earnings potential can be higher given the signs from the economy.”

Yokneam Elit, Israel-based Mellanox added 1.6 percent to $41.91 in New York yesterday, closing at a $1.1 premium to the Tel Aviv shares, the biggest among dual traded companies. The Israeli shares rose 2.6 percent today to 155.90 shekels, or the equivalent of $41.80.

Consumer Confidence

Allot, based in Hod Hasharon, Israel, gained 4.3 percent to $22.89 yesterday. The Israeli stock advanced 4.5 percent to 86.17 shekels, or the equivalent of $23.10.

The Conference Board’s index of U.S. consumer confidence was 70.2 this month, in line with the median analyst forecast in a Bloomberg survey, down from a revised 71.6 reading in February, according to the New York-based research group. Another report yesterday showed home prices dropped at a slower pace in January, signaling stabilization in the U.S. housing market.

“As the economy improves it gives people more confidence that everyone is becoming more connected and that the infrastructure for it has to be upgraded,” Andrew Uerkwitz, an Israeli technology analyst at Oppenheimer in New York, said by phone yesterday. “People recognize that these companies have a technology that will drive future innovation.”

Double Valuation

Mellanox’s climb to the highest level since its initial public offering in February 2007 sent valuations to 29 times estimated earnings, nearly double the 15.5 multiple for the average company on the Nasdaq Composite Index. Allot’s surge pushed valuations to 40.4 times estimated earnings.

Israel, whose population of 7.8 million is similar in size to Switzerland’s, was upgraded to developed-market status by MSCI Inc. (MSCI) in May 2010, the same month the 63-year-old country was accepted to the Organization for Economic Cooperation and Development. Israel has about 60 companies traded on the Nasdaq, the most of any nation outside the U.S. after China.

EZchip Semiconductor Ltd. (EZCH), the Israeli chipmaker, fell 0.4 percent to $44.68 yesterday in New York, after reaching a record $45.27 on March 20. The Tel Aviv shares gained less than 0.1 percent to 165.70 shekels, or the equivalent of $44.43.

The Yokneam-based company reported on Feb. 8 a fourth- quarter loss of $6 million after recording a $4 million profit in the same period of 2010, and Chief Executive Officer Eli Fruchter told analysts he expects revenue during the first three months of 2012 to be “flat to slightly down.” Still, shares have advanced 21 percent since the earnings release.

‘Still Cheap’

The 58 percent gain by EZchip this quarter sent valuations to 34 times estimated earnings.

“The argument for EZchip is that the valuation is still cheap if you look out at the growth potential,” Uerkwitz at Oppenheimer said. “With margin expansion possible on top of strong revenue growth, current buyers think the valuation has plenty to give.”

Radware Ltd. (RDWR), the Israeli developer of security software and cloud-computing technology, advanced 1.8 percent to $36.32, the highest level since June 1.

Shares of the Tel Aviv-based company will probably advance to $45 in the next 12 months, up from a previous estimate of $40, RBC Capital Markets LLC said in an e-mailed report yesterday.

Elbit Systems Ltd. (ESLT), Israel’s biggest non-government defense company, climbed 1.8 percent to $37.90 yesterday. The Tel Aviv shares rose 0.4 percent to 142.3 shekels, or the equivalent of $38.15.

The Haifa, Israel-based company signed a pact with Boeing Co. (BA), the biggest U.S. plane manufacturer, to distribute a simulation project in Porto Alleger, Brazil.

To contact the reporter on this story: Tal Barak Harif in New York at tbarak@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net

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