Cisco Lifts EZchip Above Peers on Sales: Israel Overnight

EZchip Semiconductor Ltd. is beating peers by the most since February after Cisco Systems Inc., which contributed 43 percent of the Israeli chipmaker’s sales last year, said demand for products using their technology is rising.

Shares of Yokneam, Israel-based EZchip rallied 3.6 percent to $26.78 in New York yesterday to trade 1.6 percent above the Nasdaq Computer Index, the biggest price premium since Feb. 21, data compiled by Bloomberg show. The Bloomberg Israel-US Equity Index of the 25 largest Israeli companies traded in the U.S added 0.7 percent, as Caesarstone Sdot Yam Ltd. surged to a record on plans to partner with Ikea Group. The shekel strengthened for the first time in six days.

Cisco, the world’s biggest maker of networking equipment, said May 15 that revenue from telecommunications and Internet companies rose 10 percent in the U.S. as third-quarter net income climbed more than analysts estimated. Cisco’s U.S. sales growth from service providers is double what it was last year and will trickle down to EZchip, whose semiconductors are used in the San Jose, California-based company’s routers, according to Oppenheimer & Co. and Feltl & Co.

“What helps EZchip is Cisco talking about a little bit more optimistic spending environment in service providers,” Jeffrey Schreiner, an analyst at Feltl who rates EZchip a strong buy, said by phone from Minneapolis yesterday. “Higher levels of spending certainly drive higher levels of adoption of EZchip’s customer’s equipment, which leads to high-level adoption of EZchip network processors.”

In-House Development

Shares of EZchip sank 21 percent Feb. 13 after the Yokneam, Israel-based company said that Huawei Technologies Co., China’s biggest maker of phone-network equipment and an EZchip customer, is developing its processor internally. Juniper Networks Inc. switched to its own chip in 2009.

“Cisco buys $20 to $30 million a year from EZchip,” Andrew Uerkwitz, an analyst at Oppenheimer & Co., who has a buy rating on the shares, said by phone from New York yesterday. “It really depends on Cisco’s routing business. If that’s doing well, EZchip will do well.”

EZchip holds about 50 percent of the market in edge routers, Chief Executive Officer Eli Fruchter said in a phone interview with Bloomberg News on May 8. Edge routers sit closer to consumers than larger core routers.

Shares borrowed and sold short by speculators hoping to return them to owners once prices fall, have been declining as the chipmaker posted a gain in first-quarter sales and beat estimates. Short interest as a percentage of free float sank 24 percent in the five weeks to May 14, according to data compiled by Markit, a London-based research firm.

End Market

EZchip is trading at 54.2 times earnings, the highest relative to peers, including Irvine, California-based Broadcom Corp. and Analog Devices Inc., based in Norwood, Massachusetts.

Chardan Capital Markets LLC, with the lowest of nine analyst price targets compiled by Bloomberg, is projecting shares of EZchip to fall 18 percent in the next 12 months to $22. Analyst Jay Srivatsa said that instead of focusing on Cisco, investors should be concerned about the network-service providers, EZchip’s end market.

“From the calls of AT&T and Verizon, they’re not opening up their purse strings in a big way,” Srivatsa said by phone yesterday in New York. “This could be a one-quarter phenomenon, and Cisco could be one quarter away from saying it’s cutting back on router orders.”

Verizon Communications Inc., based in New York, said on a conference call April 18 that corporate services, such as voice and data transport, were declining. Dallas-based AT&T Inc. reduced its capital spending forecast to $20 billion from $22 billion for 2014 and 2015, Chief Financial Officer John Stephens said on April 23.

Caesarstone, Mellanox

EZchip added 3.6 percent to $26.78 yesterday, the highest since Feb. 15, on trading volume 1.8 times the daily average over the last three months. Shares in Tel Aviv advanced 2.6 percent to 95.20 shekels, or $26.15.

The Bloomberg Israel-US Equity Index rose to 93.20 for a third straight day of increases. Allot Communications Ltd. led the advance, gaining 4.6 percent to $13.30. Israel’s benchmark TA-25 Index climbed 0.9 percent after being closed for two days for a holiday.

Caesarstone Jumps

Caesarstone rallied 4.2 percent to $27.81, a record high. The maker of quartz-based countertops signed an agreement with the world’s largest home-furnishings retailer to serve as Ikea U.S.’s sole non-laminate countertop vendor, according to a statement released yesterday.

Mellanox Technologies Ltd., based in Yokneam Elit, Israel, advanced 2.5 percent to $56.38, a three-week high. The maker of data transferral and storage software announced on May 15 that it agreed to acquire Kotura Inc. for $82 million. Mellanox’s purchase of the developer of technology for high-speed networking will be accretive to its 2014 earnings by about 1 to 3 cents a share, according to a statement. Shares in Tel Aviv rallied 6.1 percent to 201 shekels, or $55.20.

MagicJack Vocaltec Ltd., the Netanya, Israel-based voice-over-Internet provider, was the biggest decliner on the Israel-US gauge, slipping 4.2 percent to $16.47.

The shekel strengthened for the first time in six days, as the Bank of Israel pledged May 13 to buy $2.1 billion by the end of the year to weaken it. The Israeli currency rose 0.5 percent to 3.6410 per dollar.

Before it's here, it's on the Bloomberg Terminal.