Special Report: Strong shekel’s impact on earnings
Written by: Zack Miller | March 10, 2008
This special report on the Israeli shekel appeared as part of our new subscription newsletter, Israel Opportunity Investor. You can find out more about the product and the opportunities we cover at www.israelnewsletter.com
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Throughout our research process at Israel Opportunity Investor, we get to spend a lot of time speaking with CEOs and CFOs of Israeli companies. What started as a whisper is now being echoed by industrialists, exporters, and investors. Israeli companies are beginning to feel the impact of a very strong currency. The Israeli shekel has been one of the world’s strongest currencies over the past 2 years and especially, over the last couple of months. Any Israeli exporter, from an orange distributor to high tech, is feeling the pinch of the strong shekel on their bottom line.
The Manufacturers Association of Israel predicts a surging shekel will wipe billions of dollars off companies’ profits, cause thousands of job losses and slow overall growth. Shraga Brosh, the association’s president, says if the currency remains where it is, “we are certainly on course for an economic disaster”.
The shekel recently hit a 10-year high against the dollar, with the US currency briefly trading below 3.6 shekel. Though the shekel has fallen slightly since then, the Israeli currency is still up more than 16 per cent from the levels of July last year.
Export-driven economy
With a comparatively small domestic market, Israeli companies are highly leveraged to exports, which account for 45% of GDP. In addition, the shekel has strengthened against other global currencies, including the euro and the British pound, so there is no room for Israeli companies to hide.
Exporters are reporting lost deals and tighter economics in global markets. “We predict this will cause us to lose $4.5bn in company profits,” says Mr Brosh. At IOI, we see this occurring with Israeli stocks trading in the U.S. Expense lines have soared as R&D costs have risen due to employment costs in Israel. These costs are paid out in shekel, yet these same companies report in dollars — a double-whammy.
Take Alvarion (Nasdaq: ALVR ) for example. The company admitted that it is hurt by the weak U.S. dollar compared with the Israeli shekel in a recent earnings call.
Where we go from here
There is mounting pressure within Israel for the Bank of Israel (BOI) Governor Stanley Fischer to do whatever it takes to weaken the shekel. Fischer has, to date, resisted calls for BOI intervention, relying instead on market forces to dictate the value of the currency. Over the last few weeks, as the U.S.Federal Reserve has dropped interest rates by 1.25%, instead of seeing a surging shekel (based on interest rate differential), we’ve actually witnessed the dollar stabilize (a phenomenon, we note, that has happened globally).
Headwinds turn into tailwinds
Israeli stocks have done a good job holding their own during the current market meltdown in spite of being weighted down by these currency issues. If the dollar continues to stabilize and even strengthen, Israeli stocks that trade in the U.S. will see this go straight through to their EPS lines. If this happens, look for leading Israeli high tech companies to blow past analyst estimates in future quarters and we’ll be off to the races.
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