Radware's Well Deserved Share Price; Can Ceragon Mimic Radware's Success?

 |  Includes: CRNT, RDWR
by: Shlomi Cohen

Five months ago to the week, Radware Ltd.'s (Nasdaq: RDWR) share price soared to over $40 for the first time since the bubble year of 1999, when there were times that it traded at even double that level.

The most recent run-up came after "Globes" reported that there at least two US technology giants - apparently IBM and HP (NYSE:HPQ) - who had approached the company and offered to buy it at around $50 per share.

Since then, the share has floated in the $30-40 range, and has not returned to the lows from before the "Globes" story, even when its fourth quarter results were around forecasts, but not above them.

Oppenheimer analyst Ittai Kidron--who before the jump in the middle of September warmly recommended Radware stock with a "Buy" rating and a target price that reached $30 per share-- lowered his recommendation to "Neutral" at the end of September, saying that the firm's value was exaggerated after the rumors of the acquisition.

Last week Kidron raised his recommendation back up to "Buy" with a target price of $46, which is very close to the price set in the acquisition rumors. But Kidron claims that Radware is worth a valuation of over $900 million based on the momentum in its business for the coming year, irrespective of the rumored purchase.

Kidron bases his optimistic outlook on an upcoming refresh of the Alteon platform, which Radware acquired for a tiny sum in early 2009. Kidron believes that over the next year Radware -- through giant OEM customers -- will be able to penetrate, with significant sales, the hot sectors of virtualization and cloud computing.

In addition, he feels sales to large communications suppliers will be boosted, and all this momentum will bring Radware to a high 20% operating profit margin in the last quarter of the year.

Radware currently has around $180 million in cash, and more importantly -- high deferred revenue of more than $47 million, which accords relatively high visibility for the future. In my opinion, that item hints that we won't soon return to the craziness of repeated quarterly profit warnings, as there were in the years before the Alteon acquisition.

About the acquisition rumors, it's told on the capital markets that there were in fact two offers on the board of directors' table five months ago, and the Zisapel family, primarily chairman Yehuda Zisapel and his son CEO Roy Zisapel, decided to wait for higher offers. This was based on their belief that the business will improve considerably. Last week they received some support for their bold decision from investment bank Oppenheimer, which placed the share on Friday solidly above $40, despite the fact that the acquisition rumors receded. That implies that any new offer will be well above the original one.

I believe that Radware's great turning point was the acquisition of Alteon from Nortel in the beginning of 2009, which eventually also strengthened the management team around CEO Roy Zisapel. The share price at the time was below $6, after investors abandoned it following many profit warnings. The 2008 crisis which affected the entire telecommunications equipment industry also did its part. Today, with the share about seven times higher, I wonder if what happened at Radware after the Alteon acquisition pushed the Zisapel family to decide on another bold purchase at sister company Ceragon Networks Ltd. (Nasdaq: CRNT).

Ceragon said about a month ago that it bought Norwegian company Nera for $48.5 million. Nera complements nicely Ceragon's products and geographic diversification in the microwave solutions sector for cellular networks, which are exploding with the traffic of heavy video, and need more and more investment in broadband.

The big risk in the acquisition is first of all the fact that Nera lost $14.5 million on $177 million revenue in the first three quarters of 2010. In addition, this is a Norwegian company that is distant both geographically and in mentality, with 800 workers, including an assembly plant in Slovakia.

In contrast with the unstable situation at Radware in early 2009, Ceragon carried out the acquisition a month ago when its situation was strong, after completing a strong year with record sales of $67 million in the fourth quarter.

In its field, Ceragon is known as the most efficient producer, and it has in-house capabilities to deal with its advanced platforms -- from the processor through the software and electronics to the actual metal products -- with manufacturing and assembly carried out through subcontractors.

In my opinion, these capabilities that CEO Ira Palti and his team developed in recent years, and which they integrated with a massive reduction in operating expenses at Nera, took hold in Norway much earlier than analysts estimate today, and so the share is already attractive today, at a price of around $13.

Published by Globes [online], Israel business news - www.globes-online.com - on February 15, 2011 Reprinted on Seeking Alpha with permission © Copyright of Globes Publisher Itonut (1983) Ltd. 2011