Nine companies for the next 10 years
Which Israeli firms might prove wise investments? Here are some options.
It's impossible to predict how a company will do over 10 years; the number of variables is enormous.
The story of Israeli telecom companies proves this point. Five years ago, who would have guessed that an Israeli minister would ramp up competition in this sector? Ten years ago, who would have foreseen that the Mazdas imported by Delek Automotive would lose the Israeli driver's heart?
Change of ownership and management, innovation, global economic crises, regulation - these are just a few of the variables. In any case, here are a few firms to keep an eye on.
Israel Chemicals: Demand for seeds
In the third quarter, ICL's profits and sales fell, reminding us that the company isn't immune to the state of the global economy. But despite the drop, ICL paid NIS 1 billion in dividends. Because if something can be relied on over time, it's farming and the demand for seeds.
ICL doesn't produce seeds. It sells a precursor for fertilizer: potash mined from the Dead Sea. Global population growth and changes in consumption habits increase demand for seeds - and therefore fertilizer. Some 95% of global potash production is used in fertilizer. ICL also sells its potash and other minerals and products to industries from electronics to pharmaceuticals.
The company now supplies 11% of world demand for potash, up from 7% a decade ago. It has a practically unlimited supply of the stuff, and the dry climate of the Dead Sea desert lets it build up supplies without incurring heavy storage costs. Also, while other producers have to drill and mine for potash, ICL uses simple evaporation techniques based on the sun's heat.
During the last 30 years, world demand for potash tripled to 60 million tons in 2011, a figure that should keep growing. If the world population continues to grow and living standards continue to rise, and the availability of arable land continues to shrink - demand for ICL's main product will climb.
EZchip: Thanks to Internet addicts
By 2015, more than 5.6 billion personal devices will be connected to mobile networks, Cisco Systems predicts. Cellular traffic from tablet devices is also expected to soar.
More and more people want to be online all the time and are using mobile devices for that purpose. Among the companies benefiting are Cisco, Juniper, Hewlett Packard, Alcatel, Lucent, Ericsson and ECI Telecom - all clients of EZchip Semiconductor, which makes network processors for routers.
Routers are the network component responsible for transmitting data packages depending on destination, traffic loads, the distance the information has to travel, and the cost of the journey. In other words, routers direct the Web's traffic to and from our trusty gadgets.
EZchip makes chips for routers, significantly increasing the traffic volume they can handle and the transmission speed. It's true EZchip didn't pioneer anything and isn't the only company in the field. But its chips are faster and more efficient than any competitor's; five of the world's seven biggest router makers base their products on EZchip chips.
EZchip stock has been volatile recently, mainly because it's being priced based on wildly positive growth projections. But in the long term, its growth drivers are firm. Its strategy is based on making processors; it hasn't deviated into other components. It has focused on making the smallest, fastest processors in the market.
EZchip has a policy of hiring Israel's best tech graduates for its R&D team. Maintaining its competitive edge is no easy challenge, yet EZchip has unveiled a new generation of products every three years, even though the estimated lifetime of its products is about 10 years. That way it can charge a good price for the next generation.
Housing & Construction: Israel and the developing world
H&C has the biggest inventory of land for development in Israel. Theoretically, it could build 6,664 dwellings on land listed in its books.
It books the land at ridiculously low prices, assuring future capital gains; it also has huge accrued losses for tax purposes, lowering its tax bill. Given the supply constraints afflicting housing construction in Israel, and the rising prices, its assets assure it a rosy future.
The company not only builds housing in Israel but carries out infrastructure work around the world. It builds roads, intersections, bridges, tunnels, airport runways, desalination plants, reservoirs, sewage systems and power stations in Africa, East Europe and Central America.
Its policy is to enter a new country each year. It is currently looking at Honduras, Peru, Colombia and Ethiopia. It doesn't have many rivals when it comes to experience in the developing world. Add to that low leverage and you have lots of potential.
Gazit Globe: Commercial properties in safe areas
Among Israeli real estate outfits grazing in foreign fields, it's hard to find one as tough as Gazit Globe when it comes to sticking to policy. It invests only in developed countries like the United States, Canada, Finland and Austria, and sticks to a certain type of asset.
In the United States, for instance, it buys shopping centers such as a branch of a huge retail chain. In Canada it buys office buildings leased out to medical companies and clinics, preferring assets next door to hospitals. Gazit Globe is careful to enter into long-term leases that match the average lifetime of the debt it incurred to buy an asset; it also avoids unnecessary leverage.
Cherry-picking and keeping to strategy has let Gazit Globe produce handsome returns at low risk. Global trends suggest that its focus areas are a safe harbor in tumultuous world property markets. In the United States, it buys old-age homes, which will be increasingly needed. The only real worry is whether its owners, Chaim Katzman and Dori Segal, will stay at the helm.
Delta Galil Industries: Revival of Hebrew textiles
In the third quarter, Delta increased profits 160% thanks to its acquisition of German underwear company Schiesser. Delta, for years considered a remnant of a dying industry, is a growing company that buys companies in trouble.
Behind the change is Israeli-American businessman Isaac Dabah, who bought Delta from its founder Dov Lautman four years ago. Dabah is unsentimental. He shaped a new business model under which product development is done in Israel and production is handled in Bulgaria, Egypt, China and other countries where labor costs are low. The overseas plants belong to subcontractors, not Delta.
Each year Delta invests 4% of its turnover in R&D, a rate that wouldn't shame a high-tech company. It's a world leader in making contour underwear and has seen growth in sales of seamless undergarments. It also manufactures for private labels in the United States including Nike and Victoria's Secret, and runs a chain of Delta outlets in Israel. Its diversification bodes well.
Ituran: Growing in South America
Ituran, meanwhile, is in clover thanks to increasing car thefts. A more prosperous society has more cars and more thieves. In Brazil, where the social gaps are chasmic, the police don't venture everywhere. Insurance firms have charged premiums equivalent to 30% of a car's value each year. For years Brazil's insurance firms have promoted Ituran's vehicle locating technology. Brazil is its second market after Israel, and it's a good platform to grow further on the continent.
Elbit Systems: War is still in fashion
Elbit Systems, for its part, can rely on arms races. Elbit Systems focuses on warfare electronics, and armies around the world use its products. And they're likely to keep spending on electronics even if forced to scale back in other areas.
Elbit Systems has also been growing through M&A - 40 in 12 years. Companies it has bought in Israel, Brazil and the United States have helped it maintain diversification of target markets, helping protect it from budget cuts in Europe, for instance.
Elbit Systems is also efficient and unsentimental when it comes to its suppliers, and it's stringent about meeting deadlines and keeping within budget. Its order backlog amounts to about $5.5 billion and is growing.
Strauss: Hummus for Americans
The third quarter was a varied one for Strauss Group, which sharply increased operating profit despite a slight pullback in Israeli revenues. Like other Israeli food makers, Strauss had to lower prices following cost-of-living protests and despite an increase in input costs. Outside our little pond, it didn't have to take such measures.
In the United States, the company makes chilled salads and dips - think hummus for Americans, an activity that burgeoned in the past year. Strauss also buys coffee beans and sells coffee around the world. Its coffee business grew briskly in Russia in recent quarters. It has a lot more potential in its American and Russian operations.
Perrigo: Discount drugs
In August, Perrigo said it had achieved record sales for the sixth year in a row. That's because of the areas in which it operates in pharma; its product lineup relies on trends unlikely to change.
Perrigo is an American company that listed in Tel Aviv when it bought Israeli firm Agis Industries. It makes the raw materials for over-the-counter drugs and is a leading manufacturer for private-label OTC drugs, where it has a 70% market share. It also makes nutritional additives, baby formula and medical consumer items. Perrigo doesn't dabble in drug development, the riskiest venture in the pharma world. It has cash to keep growing via acquisitions and has an efficient supply chain. It has a good name and wise product diversification.