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Buying Into The Gaza-Israel Truce

|Includes: Ituran Location and Control Ltd. (ITRN)

Happily, there will be resolutions before we sit down for a late Thanksgiving lunch tomorrow of the elusive Israeli-Gazan truce. Wednesday's blog includes an aggressive new stock idea based on the news.

The true hero of the appalling recent tit for tat bombings in Israel and Gaza was the Iron Dome system for bringing down missiles before they hit Israeli cities. This was funded by the US and built by a jv of Rafael, which belongs to the Israeli Ministry of Defense, and Raytheon. Now South Korea is rumored to want to buy a system too.

The actual software was cobbled together by mPrest Systems Ltd, a private Israeli company which does turn-key projects outsourced to its techies, usually extremely high-tech high-performance critical software applications for warfare, security, and border defense using Microsoft operating systems. It was founded in 2003 by Israeli Navy retiree Natan Barak, now CEO. but some of its boffins came from earlier Israeli predecessor software companies.

What Barak's team did was create Iron Dome from off-the-shelf software. One of the components of Iron Dome is a software system for GPS tracking of vehicles against car-jacking and to control cargo trucking, now used to track Gaza missiles.

That is the entry point for us, as the vehicle location tracking software is sold by subscription by Ituran Location and Control, an ADR. It presumably collects license fees or subscriptions from mPrest and Rafael although they are not being spoken about. Its sales are mostly in Israel itself, Brazil, Argentina, and the USA. It was established in 1995 as a spinoff from Tadiran, a defunct Israeli conglomerate. The share is at under $12.75 and yields 3.75% if we buy before Dec. 21.

ITRN reported Monday the highest number of new subs since the global financial crisis, although revenues in Q3 fell 12% to $36.8 mn, more than 75% of the total from location subscription services. Subs declined mainly because of a weaker Brazilian real, weaker Argentine peso, and weaker Israeli shekel against the $s in which it reports. Currency effects reverse. It had 653,000 subscribers at the end of the quarter.

The rest of sales are of products. Operating profits excluding currency and one-time gains from not repeated Mapa license data sales last year fell 20% to $7.4 mn or 20%+ of revenues. Net profit came in at $5.2 mn in Q3 or over 14% of revenues, down from the prior year's $6.6 mn or 16% of revenues. A payment for Mapa for cellphones last year was not repeated in Q3 this year. Overall, EPS fell to a quarter from 32 cents the prior year. It has cash in hand worth $1.33/sh, another reason this is a dividend play. It plans future payouts of at least half of net profits as dividends.

It trades at about 12x earnings and is projected to have a PEG rate of 2.35x.

Another reason for buying ITRN is that it is the Israeli Michelin Guide, having bought the Mapa group which publishes maps for the country. These are given away free in Israel

There are risks beyond the fact that this is an Israeli small cap. One is that it may go shopping for another carjacking or truck tracking firm.

I am buying because but for the Iron Dome many more Israelis and Gaza Palestinians would have been killed in the current outbreak of hostilities because Israel would have invaded Gaza again.

by Vivian Lewis, ed.,, the newsletter about American Depositary Receipts, like ITRN.

Disclosure: I am long ITRN.

Additional disclosure: this was published Weds. and we bought the shares Weds. You can reprint it if you are short of copy Thanksgiving day, or Friday