Elbit Medical Imaging: A Supplier of Dreams

Elbit Medical Imaging Ltd. (EMITF) has returned to its historical high, having posted a gain of more than 24% since the beginning of March.

The company's stock has been, without doubt, one of the most successful in terms of return since the slump in 2002. Between September 2002 and February 2003, its price ranged from $5.50 to the $3.70 low it reached in February 2003. Since then, it has risen elevenfold in value, 1,100%, excluding the generous dividends that the company has distributed. In February 2005, Elbit Medical Imaging distributed a dividend of $1.717 a share; in December the same year it distributed a further dividend of $1.11 and last week it announced a dividend of $1.51 a share, which means that if we calculate the dividends in percentile form, anyone who bought shares at $4 each at the beginning of 2003 has made more than 1,200% on his investment, or an annual return of more 300%, without doubt a handsome sum.

People keep asking me how long this can last. My answer is simple. This stock is a supplier of dreams that come true against all odds. Elbit Medical Imaging's band of supporters just keeps growing, as it becomes ever increasingly clear that a) the company keeps its word (loyalty); b) the dreams it spins never seem to run out and c) this is the premium that popular managers usually get on Wall Street.

As one who is familiar with Elbit Medical Imaging and has been following it ever since its president Mordecai (Motti) Zisser staged a brilliant takeover of Elscint-Elbit to the envy of many and in defiance of their predictions, I must make one more point in favor of the company's management; it has a good grasp of investor psychology, and this is one of the reasons that explain how a company like this, which until not long ago was losing money, has managed over four years to persuade investors to pay a twelve times more for its stock.

Elbit Medical Imaging had $636 million in cash at the end of 2006, including long-term liquid investments. If we include the company's highly successful bond issue, which it held this year and which is not included in its figures for 2006, it has an additional $80 million in cash. These are most impressive figures and were probably what caused the recent gains although they were by no means the sole factor.

In principle, when a serious investor who has no prejudiced views about Zisser and his associates, checks out Elbit Medical Imaging, he will discover that it is a company with three fantastic growth engines, all of which have promising futures. So when the investor learns what the management has done to date, he can only marvel. The stock price, based on the hard figures, is indeed very expensive. According to my calculation, the company showed earnings per share of $0.96, a figure that gives it a historical multiple of 46. Since there are no analysts covering this leading company (much to my surprise, I might add), it's difficult to predict what its bottom line will look like in 2007 and 2008, especially considering that the outcome of its investments in India is not yet clear.

Elbit Medical Imaging is like an all-terrain vehicle on four large wheels. Its has a front wheel drive is the activity in Eastern and Central Europe and in India, coupled with the expansion eastwards towards Vietnam. The two rear wheels driving all this forward are Elbit Medical Imaging's two medical technology companies, Insightec Ltd., which develops digital medical diagnostic equipment, and Gamida Cell Ltd., which develops cell therapies based on stem cell research.

What caused last month's 24% gain? There are several reasons. First, there is the recognition of what the company has been doing in real estate development, especially in India. There is insufficient room here to go into details, but the Indian story will, I feel, be the biggest ever real estate development ever to originate in this country. I make this assumption not just because of this development's magnitude, daring, and design. The management has described it as the "East European model." Put another way, the success that Elbit Medical Imaging had with its exits from projects in Eastern Europe, through the French company Klepierre Group, will probably be repeated in India. Many global asset, real estate and retail companies are interested in entering India, but not as developers.

Despite all the potential in its real estate ventures, its hospital chain, and even Insightec, the factor that I feel is really driving the stock at present is the wave of interest in recent weeks in stem cell research. This can be seen in small Israeli companies such as Pluristem Life Systems Ltd. (PLRS), which has gained 6.5 times in value from $0.02 at the beginning of February to $0.14 on massive volumes. All those companies that have a story that looks real have responded to the positive developments in stem cell research, and in particular the flood of budget approvals by states across the U.S., from California to Maryland, which is a considered a key state in this regard and which has just approved a budget for participation in stem cell research.

Elbit Medical Imaging has a significant share in Jerusalem-based Gamida Cell, together with Teva Pharmaceutical Industries Ltd. (TEVA), and several well-known funds. From what I can gather, Gamida Cell is quite advanced, compared with the many other companies developing treatments for heart and neurological diseases, and leukemia. As I have not done any surveys on this, all I can say is that over the last three months I have been asked repeatedly who Gamida Cell is and what is Elbit Medical Imaging's interest in it. Not only is Elbit Medical Imaging the largest shareholder, but Motti Zisser himself is a member of the Gamida Cell board, and is providing its management with all the consulting skills he can muster.

To sum up, there is no shortage of reasons for the stock's gain, so when it fell to $36 a month ago, I wrote that it was difficult to find an explanation for the falls, and that they represented a buying opportunity. You, of course, will check it out for yourselves, but I stand resolutely behind my theories.

EMITF 1-yr chart

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.