By Aaron Katsman
IsraelNewsletter.com

News this past Thursday of Israeli real estate developer Hefziba collapse sent shockwaves through the local financial markets. News that the company has over 1.6 Billion Shekel(about $380 Million) in outstanding debt, not including another 300 Million Shekel in a bond that they can’t pay back sent the local stock indices 4% lower.

My hunch is that this may be the begining of a much larger problem with the local financial markets. Billions of dollars were raised in bond offerings over the last 9 months, with many of the companies who successfully raised money, having lousy balance sheets. The question is how these companies plan to make their interest payments as well as pay back principal. Why is this such a big problem? Well, just like the subprime mess in the US, and the yet to be determined losses that will be taken by the financial sector, in Israel, there is no question that all the largest banks (of which there are a whopping 3) have huge exposure via both lines of credit as well as holding debt of these developers. Throw in the insurance companies and brokers, all who were the almost exclusive buyers of this debt, and we could be on the verge of a real mess in the local financial sector.

The question for foreigners who still want Israeli exposure is “now what?” Until now, the big banks (Hapoalim, Leumi, Discount) were among the most widely held stocks by foreigners. What I think we will see is a rotation from companies that make most of their money locally to multi-nationals that do R&D in Israel but not much else and have had solid earnings. Companies like Nice Systems (NICE), Alvarion (ALVR) and Given Imaging (GIVN), which all trade in both the US and Israel, should be the recipients of the aforementioned rotation.

Please see our Disclaimer HERE.

Disclosure: Author’s fund is long NICE,ALVR,GIVN as of 8/05/07.

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Aaron Katsman is the lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Answers.com (ANSW) recently announced via a press release (read it here) that due to an algorithmic change in Google Search (remember, ANSW is extremely dependent on Google traffic which we have postulated is behind their acquisition attempts for Dictionary.com), Answers is no longer showing up as frequently in Google searches.

What’s the damage? Traffic levels are currently down approximately 28% from levels immediately prior to the change.

Here’s what the company had to say:

“The major search engines modify their algorithms all the time,” added Mr. Rosenschein (ANSW’s CEO). “This change only demonstrates the sound business rationale behind our agreement to purchase Dictionary.com, because it underscores a primary motivation for the deal: to secure a steady source of direct traffic and mitigate our current dependence on search engine algorithms… As we work to restore normal traffic levels to Answers.com, we are confident that our efforts will result in a stronger and more valuable company.”

The issue of dependence on Google’s traffic is also recognized by Answers’ bulls, notably Michael Eisenberg, an early investor in the company.

Clearly, Answers needs to diversify away its risk inherent in depending on Google so greatly for traffic. The rationale behind the acquisition of Dictionary.com was ANSW’s answer to procuring organic traffic.

Now, things are really tough for Answers. Before this happened, it was unclear that Answers could get a $100M deal done. Now that their traffic is plummeting, it may get even harder. Combined with a cratering high yield market and a decreased appetite for stocks, Answers should be scrambling looking for The Answer.

Disclosure: Author’s fund does not have a position in any of the stocks mentioned here as of 8/1/07.

Please see our Disclaimer HERE.

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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com

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STARLIMS Technologies (LIMS) is a recent Oppenheimer-underwritten IPO having floated on the Nasdaq in late May. It is a small offering with a market cap of just under $100MM. It’s flying under the radar — like many Israeli smallcaps who eventually provide good returns for investors by growing quickly and getting scooped up by larger multinationals. So, I decided to take a look under the hood. You can also take a look at their IPO registration documents.

The Business

STARLIMS competes in the Laboratory Information Management Systems market with over 20 years experience marketing in this space. Their software “manages the collection, processing, storage, retrieval and analysis of information generated in laboratories.”

The Solution

Importantly, their software “…improves the reliability of sampling processes, supports compliance with domestic and international regulations and industry standards, and provides comprehensive reporting, monitoring and analysis capabilities.” The software package comes off-the-shelf and is truly web-based, enabling global research organizations an effective way to manage distributed laboratories.

The Market

According to Frost and Sullivan report, suppliers of commercial LIMS had revenues of $440M in 2006 and the global market is expected to grow at a CAGR of 12% through 2010 where it’s expected to reach $700MM.

Trends

Globalization stretches the resources of many organization and results in labs being dispersed around the world. It’s extremely important to cohesively manage the analytical results pertaining to a singular product. The improvement in the connectivity between dispersed locations and the adoption of Internet technologies is driving demand. Old legacy systems are being transitioned over to more commercial LIMS systems. The need to comply with industry regulation and enforce traceability of laboratory tests is a key factor driving the demand for commercial LIMS implementations.

Competitive Advantages

• Experience: LIMS has been a pure-play for 20 years

• Web-based technologies: The LIMS solution addresses evolving market trends towards centralized LIMS solutions

• Regulatory Focus: LIMS solution is focused on providing customers a cogent way to comply with existing and emerging regulatory statutes

Growth Strategy

LIMS is pursuing 5 distinct paths for growth:

1. Expanding international sales: North American sales account for about 75% of sales. The company is investing in building out its capabilities outward.
2. Drilling down into core markets
3. Expanding presence in the LIMS replacement market: Like any market, there is an upgrade cycle where home-grown/custom-designed systems become obsolete. In addition, several competitors are no longer supporting these legacy systems. LIMS believes this is a growth opportunity.
4. Continuing to address adjacent markets: STARLIMS plans to expand their product functionalities into complementary markets.
5. M&A: With no concrete plans tables, the company is looking to enhance value through acquisitions.

Competition

The LIMS market is highly competitive, consolidating and not dominated by any one player. According to this elusive Frost and Sullivan report (sorry, I couldn’t locate it), the top 5 LIMS players account for 53% of the global market. Principal competition comes from Thermo Fisher Scientific (TMO) and Applied Biosystems (ABI).

Financial Performance/Valuation

During the past year, STARLIMS posted a 21% increase in revenues to $19.7 million and net income was $3.7 million. Looks like LIMS is getting market-share of a market estimated to grow at only 12%. On a price-to-sales and a price-to-book ratio, they are undervalued when compared to the industry and sector.

I generally like to see stronger market growth figures but looking at LIMS, what you have is a small and growing company with lots of industry knowledge and experience, leveraging natural and secular growth of the industry by gaining marketshare away from competitors and by providing a nifty web solution.

They report on August 13th. I’d wait on the sidelines as the company gets its publicly-traded legs and gets used to reporting to the Street. As the smoke settles, this might be an interesting play for small-cap investors looking at some of the best of Israeli technologies.

Disclosure: Author’s fund does not have a position in LIMS as of 8/01/07.

Please see our Disclaimer HERE.

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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com

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Despite a trying tape, numerous Israeli stocks have proven that stock performance and company performance are not the same thing.

Scopus Networks (SCOP) reports.

Alvarion (ALVR) reports.

ECI (ECIL) out with earnings. Read our recent piece on ECIL.

Commtouch (CTCH) out as well. See our coverage of Commtouch to learn more about what we think about this stock.

Partner (PTNR) releases earnings. Read how Cellcom, Israel’s leading mobile operator stacks up against Partner.

Oops, almost forgot Teva (TEVA).  Here you go.

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