Sunday, September 6, 2009

Spotlight On: The Other Israel

Spotlight On: The Other Israel

Do you picture Israelis spending their day scurrying from bomb shelter to bomb shelter much like Londoners during the blitz? Does your image of Israel include soldiers patrolling the streets, buses being blown-up and men in long black coats rioting? If these images inform your opinion of Israel, then media distortions are keeping you from some exciting investment opportunities.

Tel Aviv is not Bagdad. Each morning in Israel, children go off to school and people go to work. Leisure time is spent in restaurants, cafes, movie theaters and malls. During the current financial crises, the Israeli economy suffered less than most developed countries and a recovery is already under way.

With the exception of Canada, more Israeli companies trade their shares on the various New York exchanges than any other country in the world.In fact, more than 100 companies trade in New York. The companies trade range from world class industry leaders such as Teva Pharmaceuticals (TEVA) and Check Point Software Technologies (CHKP) to young, dynamic companies.  Israeli companies are particularly active in technology, biotechnology, defense and telecom. These companies are known for developing cutting edge technology solutions in their particular industries. The internet would not exist in its current form with Israeli innovations such as instant messaging and file compression. 

One of the companies we follow is 012 Smile Communications (SMLC)

From Reuters:

"012 Smile.Communications Ltd., incorporated in 1999, is a communication services provider in Israel, offering a range of broadband and traditional voice services. The Company operates in two segments: broadband and traditional voice services. The Company’s broadband services include broadband Internet access with a suite of value-added services, specialized data services and server hosting, as well as services, such as local telephony via voice over broadband (VoB) and a wireless fidelity (WiFi) network of hotspots across Israel. Its traditional voice services include outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. The Company offers its services to residential and business customers, as well as to Israeli cellular operators and international communication services providers, or carriers through its integrated multipurpose network, which allows the Company to provide services to almost all of the homes and businesses in Israel."
The company is that rare breed of young tech companies, it is profitable. EPS for FY08 are $0.50; TTM EPS is $1.18. Consensus earning for FY09 range from $1.04 to $1.43 with an average of $1.18. Estimated earnings for FY10 range from $1.08 to $1.36 and average $1.20. Measured Approach estimates FY09 earnings to be $0.76. We place more importance to free cash flow than on EPS. In FY08, FCF came in at $1.58. FCF for the trailing twelve months is up to $2.07. Again, Measured Approach sees a short term decline in FCF to $1.70.

At current prices, the company trades at a modest PE of 9.28x and a PSR of 0.90. ROI for the TTM is 9.67% and Return on Equity is 15.23%. Sales and earnings are growing and operating margins continue to expand each year. Though debt levels may be a little higher than we would like, they are generally better than the industry's (depending on which metric you use). More importantly, debt ratios improve every year. In addition, the receivables to sales ratio has not gotten out of hand and has remained stable as the company grew.

Our near term price target for SMLC is $16.59 and longer term $25.51. Israeli companies offer tremendous potential for every type of investor and something for gamblers and speculators too.

Disclaimer: Author is long CHKP and SMLC.

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