Elbit Drops After Turkey Halts Military Ties

Elbit Systems Ltd. (ESLT), Israel’s largest non-government defense contractor, fell to a two-week low on concern deteriorating diplomatic relations with Turkey and a lower defense budget in the U.S. will cut revenue.

Elbit retreated 1.8 percent to $39.09 on the Nasdaq Stock Market on Sept. 2, the lowest since Aug. 19. The Tel Aviv shares fell 5 percent to 137.70 shekels, or the equivalent of $38.20 at the 4:30 p.m. close in Tel Aviv today. The $1.14 discount between the two based on the Sept. 1 close of 145 shekels, was the second-biggest among the largest Israeli companies traded in New York, according to data compiled by Bloomberg. The Bloomberg Israel-US 25 Index dropped 2.2 percent to 84.18 on Sept. 2, trimming its weekly gain to 1.2 percent.

Haifa, Israel-based Elbit is lagging the Nasdaq Composite Index (CCMP) and the Bloomberg Israel-US 25 Index over the last 12 months on growing concern a downgrade in Israel’s military and diplomatic relationship with Turkey and U.S. defense-budget cuts will reduce revenue.

“Turkey is more of a sentiment issue than a fundamental issue,” said Richard Gussow, an analyst at Deutsche Bank AG from New York, who has a “hold” recommendation on Elbit. “Their bigger issue is the defense budget cuts.”

Calls and e-mail messages sent to Hanna Yonai, Elbit’s spokeswoman, weren’t immediately returned.

Turkey will keep military accords on hold with Israel and cut diplomatic ties to second-secretary levels barring an apology for the killing of Turkish activists on a flotilla to Gaza last year, Foreign Minister Ahmet Davutoglu told reporters in Ankara on Sept. 2.

UN Report

Turkey is severing ties with its once-closest ally in the Middle East before the presentation of a United Nations report on Israel’s raid in May last year on vessels attempting to breach the blockade of the Hamas-controlled Gaza Strip.

The UN said Israel’s naval blockade is legal and the country is entitled to enforce it while adding that the country’s effort to stop the flotilla was “excessive and unreasonable,” according to the 105-page report obtained by the New York Times and posted on its website.

Shares of Elbit dropped 5.2 percent in the two days after the flotilla raid to 189.20 shekels.

Revenue in 2010 fell 5.7 percent to $2.7 billion from the year before mainly because of a drop in sales of land systems activities following the end of the M-60 project in Turkey, as well as a drop in income for the Bradley project in the U.S., the company said in a statement distributed by PR Newswire on March 15.

‘Deteriorating Relationship’

“The deteriorating relationship between Israel and Turkey has had an impact for quite some time now on Elbit,” said Gilad Alper, an analyst at Excellence Nessuah Investment House in Ramat Gan, Israel. “Over the last couple of years some of their contracts have been put on hold.”

Elbit gets about 5 percent of its revenue from Turkey, according to Alper. The U.S. accounted for 32 percent of second- quarter revenue, according to data compiled by Bloomberg.

U.S. defense spending plans will decrease at least $330 billion over the next decade under the debt-reduction bill that President Barack Obama signed into law on Aug. 2, according to the Office of Management and Budget.

An additional $500 billion would be cut if a congressional supercommittee fails to find additional savings in other federal spending or if Congress rejects its recommendations.

Asian Contracts

Elbit won contracts worth about $20 million from several Asian customers to supply observation systems for maritime patrol aircraft, vessels and towers, the company said in a statement to the Tel Aviv Stock Exchange on Aug. 17. It reported the previous day that second-quarter sales rose to $691.6 million from $603.3 million in the same period last year.

The decline in Elbit’s shares in the U.S. pushed valuations down to 10.7 times trailing earnings, below the average level for companies on the S&P 500 Aerospace and Defense Index.

“The defense stocks are trading at very low valuations due to the fear of cuts in government spending,” said Jamia Jasper, president of AmerIsrael Capital Management LLC in New York. “Turkey is a very insignificant part of Elbit’s customer base. The fundamentals of the company are strong.”

Israeli Prime Minister Benjamin Netanyahu has said his country’s response to the flotilla was justified. Israel won’t apologize for the deaths as its soldiers acted in self defense, said a government official in Jerusalem who declined to be identified because he wasn’t authorized to speak publicly on the matter. Israel regrets the loss of life and hopes to find a way to resolve clashes with Turkey, he said.

Boycotts

Israeli products, especially those from companies based in or with facilities in the West Bank, have been the target of boycotts. Norway announced in 2009 it would exclude Elbit from its sovereign-wealth fund, Europe’s largest, because of the defense company’s involvement in the construction of a West Bank security barrier.

The shekel weakened the most in two weeks, retreating 0.8 percent to 3.6051 per dollar on Sept. 2. Israel’s benchmark TA-25 Index slid 4.4 percent to 1,082.47 today, bringing the decline this year to 18 percent.

Israel, whose population of 7.7 million is similar to Switzerland’s, has 57 companies traded on the Nasdaq, the most of any country outside the U.S. after China. The country is also home to the largest number of startup companies per capita in the world.

Israeli technology companies raised $569 million in capital during the second quarter of 2011, the most in two years and up from $343 million in the same period last year, according to the Israel Venture Capital-KPMG Quarterly Survey released July 13.

Market Upgrade

The nation’s stock market was upgraded to developed market status by MSCI Inc. in May 2010, the same month the 63-year-old country was accepted into the Organization for Economic Cooperation and Development.

Retalix Ltd. (RTLX)’s U.S.-traded shares climbed for a third day on Sept. 2, rising 1.6 percent to $13.60. The Israeli shares dropped 1.8 percent to 48.12 shekels, or the equivalent of $13.35, today.

Fundtech Ltd. (FNDT), the Israeli provider of banking software for Bank of America Corp. and HSBC Holdings Plc, dropped 3.5 percent to $16.19. The Tel Aviv shares retreated 4 percent to 59.48 shekels, or the equivalent of $16.50, today.

EZchip Semiconductor Ltd. (EZCH), the Israeli maker of network processors that counts Cisco Systems Inc. as a customer, sank 3.6 percent to $29.90. The Israeli stock tumbled 6.7 percent to 108 shekels, or the equivalent of $29.96, today. The $2.21 discount on Sept. 2 was the largest among the biggest Israeli companies traded in the U.S.

-- With assistance from Gwen Ackerman and Calev Ben-David in Jerusalem. Editors: James Kraus, Peter Torday

To contact the reporters on this story: Tal Barak Harif in New York at tbarak@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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