Clal Finance Brokerage today cut its recommendation for Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) to "Sell", and set a target price of $60, after its share price jumped 40% since publishing its financial report for the first quarter of 2012 after closing on Nasdaq on Wednesday.
"With the recognition of Mellanox's InfiniBand technology as an important factor in advanced computing, the positive surprise will most likely come from an acquisition or takeover attempt. However, at the current risk-reward equation, we prefer profit taking and to wait for a better entry point," says Clal Finance analyst Jonathan Kreizman.
Kreizman said that the key question now is how much ammunition Mellanox has to spring a surprise on the market. Although he has raised his 2013 forecast for the company to $2.61 earnings per share on $491 million revenue in 2013, from $2.47 earnings per share on $476 million revenue, he cautions that, despite the strong business momentum, "we believe that the company's ability to beat these numbers is limited at this time."
Clal Finance's 2013 profit forecast for Mellanox reflects an operating profit margin of 26%, at the upper end of the company's long-term guidance. "We note that despite the optimism and tail wind from the results, due to the size of competition in the 10 GbE market and the entry of Intel into the InfiniBand competitive picture, Mellanox will struggle to avoid channeling more resources to R&D, which we believe will make it difficult to exceed the upper limit of the 21-26% operating profit margin target."
Kreizman says that possible positive triggers for Mellanox's share could come from an acquisition, which is most likely scenario that the market will welcome, but whose timing cannot be predicted. He says that an attempt to take over Mellanox is a less likely, but still possible scenario. A large upside on the current high expectations following the company's first quarter results is unlikely.
Clal Finance predicts that Mellanox will report $2.29 earnings per share of $441 million revenue in 2012.
Mellanox's share price rose 9.8% by midday on the TASE today to NIS 228.20, after falling 6.7% on Nasdaq on Friday to $61.52, giving a market cap of $2.46 billion.
Published by Globes [online], Israel business news - www.globes-online.com - on April 22, 2012
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