"Globes" invited Israel's top five investment houses to name a favorite stock for next year. Here are their choices.
IBI Investment House Ltd.
Spacecom Satellite Communications Ltd. (TASE:SCC) will triple its revenue in 2012. "Buy" recommendation with a target price of NIS 84
Why buy?
The aerospace industry, especially for satellites, has very high entry barriers, and the industry also enjoys strong demand growth from several growth engines, including the sharp increase in the number of HDTV channels, growth in satellite Internet subscribers, and strong growth in demand for bandwidth for military needs. These trends are even stronger in emerging markets.
The best way to gain exposure to Israel's aerospace industry is through Spacecom, which has an aggressive growth plan, part of which is far advanced. The Amos 5 communications satellite was successfully launched in December and is heading to its e17 node, where it will provide services for Africa, one of the fastest growing regions for satellite communications. The Amos 4 will be launched in 2013, and the Amos 6 in 2014.
The Amos 5 and Amos 6 have greater capacity than current communications satellites, they are more advanced, and, surprisingly, their manufacturing, launch, and maintenance costs are lower, creating immense upside potential.
There is an interesting story behind each satellite. The Amos 4 was mostly financed by the Israeli government, and will be a state-of-the-art satellite. The Amos 5 will mean a huge leap in Spacecom's orders backlog, and the Amos 6 will replace the Amos 2 and Amos 3 satellites. IBI believes that the realization of these plans will triple Spacecom's revenue over the next five years, making it a very profitable company with a strong cash flow, and therefore a very worthwhile investment.
Risks
Failures in a satellite launch and in implementation of Spacecom's aggressive growth plan, and its dependence on a single customer - DBS Satellite Services (1998) Ltd. (YES) - which still accounts for 35% of revenue. Despite the strong optimism for 2012, these risks require constant monitoring of the company and its business development.
Today's opening price: NIS 62.51, giving a market cap of NIS 1.24 billion.
Return in 2011: -11.75%
Revenue in January-September 2011: NIS 62.5 million.
Meitav Investment House Ltd. analyst Eyal Lazerovich
Microsoft Corporation (Nasdaq: MSFT), with an "Outperform" recommendation and target price of $26.
Why buy?
Microsoft is a leading technology company that sells licenses and provides technical support for a range of computer software products and services. The company has five major divisions: the core ones are the business, operating systems, and services divisions; and the two smaller divisions media and entertainment devices and Internet.
In the past decade, the company has switched from the pricing of a growth company with a p/e ratio of over 30, to the pricing of a value company with a predictable single-digit p/e ratio of 9.4 for 2012 and 8.5 for 2013.
The company generates cash flow of over $20 billion a year from its regular operations, and has over $40 billion in net cash reserves ($5 per share). Investors enjoy a dividend return of over 3%, after the company increased its dividend by 13% a year over the past five years. Microsoft is also carrying out share buybacks.
Microsoft is traded at a low multiple and distributes handsome dividends. The company is due to launch the Windows 8 operating system in 2012, and it will try to strengthen its hold in growing markets, such as tablet computers, smartphones, and entertainment. The company owns a large number of patents and solutions to support cloud computing and entertainment, which will probably be growth engines.
In addition, Microsoft's struggle against piracy is bearing fruit, and should also support sales.
Risks
A substantial part of Microsoft's revenue and profits are strongly correlated with growth of the PC market, which will likely grow relatively slowly in the coming years. One of the reasons for the share's low pricing is investors' concerns about the company's future, due to the growth of markets such as tablets and smartphones.
Microsoft is in a market characterized by frequent changes, which are hard to predict in the time frame of a few years forward. Microsoft has made acquisitions, such as Skype, and is expected to make more (possibly Yahoo! Inc. (Nasdaq: YHOO) and Research in Motion Inc. (Nasdaq: RIMM)), the success of which can only be judged in the future.
Tuesday's closing price on Nasdaq: $25.82, giving a market cap of $219 billion.
Return in 2011: -6.7%. Revenue in January-September (the last two quarters of fiscal year 2011 and the first fiscal quarter of 2012: $51.16 billion.
Bank Hapoalim analyst Yaron Friedman
Israel Corporation (TASE: ILCO) is traded at a 50% discount on the value of its assets. "Outperform" recommendation with a target price of NIS 4,488.
Why buy?
Friedman says that Israel Corp.'s assets portfolio has three layers. The first layer is the "mature layer", which includes Israel Chemicals Ltd. (TASE: ICL) and Oil Refineries Ltd. (TASE:ORL) - two very sound heavy industry companies, especially Israel Chemicals, a fertilizer maker that enjoys strong demand. Oil Refineries benefits from the robust Israeli market, although its results are more volatile as they depend on the global price of oil and oil products.
The "growth layer" includes IC Power Ltd., which builds and operates power stations, mostly in South America. The company is also building a power station in Israel, which is due to come online in late 2012. Another company is specialty foundry Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM), which has consolidated its operations in the past few years, and even swung to its first-ever quarterly net profit in 2010. Two other companies that are nearing commercial operations are electric car venture Better Place LLC, which is due to begin commercial operations in 2012; and Qoros Automotive Company Ltd. (formerly Quantum Chery LLC), a joint venture in China that is due to launch its first model in 2013.
The third layer is Zim Integrated Shipping Services Ltd., a less successful story for Israel Corp. Although Zim is suffering from severe deterioration in its financial soundness, due to the crisis in the marine shipping industry and rising fuel costs, but Zim only accounts for a negligible 2% of Israel Corp.'s holdings portfolio, so even in poor scenarios, it has only a minor effect on Israel Corp.'s value.
Meitav believes that Israel Corp.'s share is current traded at 50% of the value of its assets, making it recommended.
Risks
The main risk is a possible deterioration in Israel Chemicals' business, which accounts for over 80% of the value of Israel Corp.'s portfolio. Such deterioration could come from a downturn in the fertilizer or bromine markets, which are relatively sensitive to the global economy (these markets appear to be stable for now). Meitav believes that the risk from the investment in Zim is limited, due to its low weight in the assets portfolio. Other risks relate to failures by the Better Place or Qoros ventures, which are facing milestones that will determine their future development.
Today's opening price: NIS 2,465, giving a market cap of NIS 19 billion.
Return in 2011: -42.32%.
Revenue in January-September: $8.8 billion.
Clal Finance Ltd. analyst Shmulik Keshet
Intec Pharma Ltd. (TASE: INTP): get its progress for free. "Buy/high risk" recommendation with no target price.
Intec Pharma uses proprietary "accordion capsule" technology to improve existing drugs. The technique can serve as a platform to improve a range of medications that need to stay in the stomach to maximize their efficacy. The company's development could provide pharmaceutical companies worldwide with the option of extending the patents on their brand drugs, which is worth a fortune to them.
Since the company is improving medications, rather than developing new ones, it offers many advantages until final regulatory approval. For example, there is no need for preclinical animal trials, and the human trial size is relatively small, resulting in lower costs.
In addition, Intec Pharma has obtained US Food and Drug Administration (FDA) fast-track approval procedures, and is about to complete two Phase II clinical trials on two blockbuster drugs. If they are approved for market, they could give it substantial market share, possibly to the point of completely replacing the original drug. The results are bringing Intec Pharma much closer to negotiations on commercialization agreements with big pharma companies - commercialization that is conservatively estimated, depending on milestones, at hundreds of millions of dollars in cash flow, mostly from long-term royalties.
Intec Pharma has met all its targets for the past two years, and is now traded close to its IPO price nearly two years ago. Therefore, it is possible to get all its dramatic progress in this period for free.
Risks
The recommendation is classified as high risk. Although the company is at a fairly advanced stage in its clinical trials, and has succeeded nicely, it is basically a start-up without revenue. It is also engaged in the sub-field of drug improvement, not drug development, where the risk is much lower. Nonetheless, an upside in the specific case is no less, giving it preference in terms of the risk/reward equation.
Today's opening price: NIS 0.931, giving a market cap of NIS 175 million
Return in 2011: -18.09%
Revenue in January-September: zero
Ubank Ltd. research department manager Ariel Corinaldi
Matrix IT Ltd. (TASE:MTRX): a strong company with handsome cash flow and dividends. "Buy" recommendation with a target price of NIS 24.
Why buy?
Matrix IT provides hardware and software solutions, together with installation and training for many companies. It is a fairly new company, which recently marked its 10th anniversary, but it is actually an industry veteran created by the merger of five software companies of Formula Systems Ltd. (Nasdaq: FORTY; TASE: FORT). Matrix IT has a range of operations and growth engines in defense, enterprise resource planning (ERP), cloud computing, customer relations management (CRM), and core systems for the financial market sectors.
Another interesting and rapidly growing activity is its nearshore operations in Israel, where it trains haredi (ultra-orthodox) women to provide development and software testing services. The company employs 850 haredi women at its development centers.
Over the years, under the management of CEO Moti Guttman, the company's strategy has been based on mergers and acquisitions to strengthen current activity and enter new ones. Matrix IT is currently Israel's largest IT services company, with a market share of over 15%.
Matrix IT's aggressive acquisitions strategy, combined with organic growth, has enabled it to present six-fold growth over the past decade, and ten-fold growth in its operating profit to NIS 130 million in 2010. Revenue rose 16% in January-September 2011, and operating profit rose 8.2%. The company also has a surplus in its balance sheet and has strong cash flow from operations. Other strong points are its experienced and respected management, and its high dividend return of over 58%.
Bottom line, this is a strong company, which is the market leader and has a wide range of activities. The company presents experienced management that has demonstrated its mergers and acquisitions ability.
Risks
It is important to note that Matrix IT depends on the Israeli economic environment, especially the current environment. The Israeli economic slowdown is liable to reduce demand for outsourcing, lower investment in computing projects, increase competition, and affect profitability.
Today's opening price: NIS 18.90, giving a market cap of NIS 1.13 billion.
Return in 2011: -7.98.
Revenue in January-September 1.28 billion. The parties in this article may invest in securities/instruments, including those mentioned here. The statements here do not constitute advice or marketing of investments, which are subject to the specific needs of each person.
Published by Globes [online], Israel business news - www.globes-online.com - on December 29, 2011
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