Ericsson China Outlook Spurs EZchip Premium: Israel Overnight

EZchip Semiconductor Ltd. (EZCH) climbed in U.S. trading, widening the premium to Tel Aviv by the most among New York-traded Israeli companies, after Ericsson AB said phone equipment sales in China will rise.

Shares of the Yokneam, Israel-based manufacturer of network processors gained 0.6 percent yesterday to $43.70, pushing the premium over the Tel Aviv shares to 29 cents, the largest among companies on the Bloomberg Israel-US Equity Index. (ISRA25BN) The gauge fell 0.8 percent to 89.58, led by Partner Communications Co. EZchip shares were unchanged at 162.20 shekels, or the equivalent of $43.39, at 10:04 a.m. in Tel Aviv.

EZchip, whose shares provided the best risk-adjusted returns this year among Israeli companies that trade in New York, is benefiting from faster Internet traffic and new wireless gear that drives up demand for the company’s processors, said Gary Mobley, an analyst at Benchmark Co. Phone equipment expenditure has “room for growth” in China, Leif Johansson, chairman of Ericsson (ERICB), the world’s biggest maker of wireless network equipment, said yesterday.

Spending by Chinese companies on mobile phone infrastructure “plays right into the hands of processor companies” like EZchip, Mobley said by phone from St. Louis. “Internet traffic is being driven by an increase in internet usage from a multitude of new devices.”

EZchip has gained 54 percent in the U.S. this year with a volatility of 36, giving the company a risk-adjusted return of 1.5 percent, the best among the 25 Israeli companies traded in New York. Allot Communications Ltd. (ALLT), the networking equipment maker that’s also benefitting from rising internet traffic, was the second-best performer, with a 1.1 percent gain. Allot slid 0.7 percent to 87.90 shekels, or the equivalent of $23.51, in Tel Aviv today.

‘Growth Potential’

EZchip’s revenue will jump to $100 million in 2013 from a $71 million forecast this year, according to the median estimate of eight analysts surveyed by Bloomberg.

EZchip “is the sort of stock that has a clear earnings growth potential,” Daniel Berenbaum, an executive director at MKM Partners LLC. in Stamford, Connecticut, said by phone yesterday. “What you’ve got happening is you need more and faster routing capability.”

Internet traffic is surging as consumers access the web from mobile devices including Apple Inc.’s iPad and iPhone to stream movies and chat with friends, Berenbaum said. Sales (AAPL) of both gadgets hit a record last quarter, and the company said it shipped 3 million of the iPad’s newest model during the debut weekend, also a record.

Data usage by mobile devices will increase 18-fold by 2016 to 10.8 exabytes per month, or the equivalent of streaming 33 billion DVDs annually, as the number of smartphones, tablets and other portable devices exceeds the world’s population and Internet connection speeds increase, according to a forecast from Cisco.

‘Underlying Demand’

“Growth of smartphones in China can develop much more than it already has,” Ericsson’s Johansson said in a Bloomberg Television interview from southern China yesterday. “My sense from meeting with customers here, there is an underlying demand for traffic network, especially in this country.”

China Mobile Ltd., the country’s biggest carrier, had 661.4 million mobile-phone subscribers at the end of February, according to figures released last month. That’s about twice the number of people in the U.S.

Ericsson accounted for more than 10 percent of EZchip’s fourth quarter revenue, EZchip Chief Executive Officer Eli Fruchter said on a conference call with analysts on Feb. 8, according to a transcript.

Monetary Easing

The Nasdaq (CCMP) Composite Index slid 0.2 percent yesterday as minutes from a U.S. Federal Reserve meeting showed the central bank is holding off on new monetary easing, and U.S. factory orders increased less than forecast in February. The gauge gained 19 percent in the first three months of this year, its best quarterly performance since the period ended June 30, 2009.

The benchmark TA-25 (TA-25) Index declined 0.4 percent to 1,141.97 today in Tel Aviv.

Israel, whose population of 7.8 million is similar in size to Switzerland’s, has about 60 companies traded on the Nasdaq Stock Market, the most of any country outside the U.S. after China. The nation is also home to more startup companies per capita than the U.S.

EZchip’s gain has pushed valuations through yesterday to 68 times reported earnings, more than four times the average multiple for companies on the Philadelphia Semiconductor Index. (SOX)

Overvalued

Cavium Inc. (CAVM), a San Jose, California-based maker of chips for communications networks, said on April 2 after markets closed that revenue in the first quarter of 2012 will be 6 percent to 7 percent lower than in the prior period after service provider sales fell, according to a statement distributed by PRNewswire. Shares fell 0.6 percent to $30.38.

EZchip is overvalued and may fall amid lower companies’ spending, Jay Srivatsa, the managing director of equity research at Chardan Capital Markets LLC said yesterday.

“Cavium specifically said that the service provider market is weak and that’s the market that EZchip really caters to,” Srivatsa, who has a neutral rating and a $30 price target on EZchip, said by telephone from New York. “The stock has run away a little bit, and is very pricey in my view.”

ClickSoftware Technologies Ltd. (CKSW), a Petach Tikva, Israel- based maker of order-tracking software, gained 4.2 percent to $12.96 yesterday, the biggest jump in two weeks.

“The company’s business momentum is improving,” Nathan Schneiderman, an analyst at Roth Capital Partners LLC. in Newport Beach, California, wrote in an e-mailed report yesterday, raising his 12-month price estimate on the stock to $15 from $12.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

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

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