The conflict over the Gaza strip has dominated international headlines for quite some time now. An enduring resolution to this crisis seems elusive at the moment. Consequently, attention had shifted from Israel’s economic situation, until now. Data released on Sunday shows that economic growth had declined even before the conflict in Gaza commenced.
Growth Takes a Hit
According to data released by Israel’s Central Bureau of Statistics (CBS), GDP growth declined to 1.7% during the second quarter of 2014. Growth during the April to June quarter was significantly lower than the 2.5% rate recorded in the first quarter of 2014 and 2.8% in the last quarter of 2013. Israel’s economy grew at 2.5% during the first half of the year.
In fact, growth is at its lowest level since the economic downturn experienced during the first half of 2009. Taking into account the fact that the country’s population is growing at around 1.7% every year, per capita growth has not taken place.
A 17.7% annualized decline in service exports and a 4.5% drop in fixed investment were the major reasons for a decline in growth. The CBS has emphasized that these are initial numbers which could change once new data is taken into account. These figures come close on the heels of an increase in the unemployment rate during June. The metric increased from 5.6% in April to 6.3% in June.
Costs of War
These figures do not take into account the damage caused by the month-long conflict with Hamas. The $250-billion economy will lose heavily as a result of the continuing offensive. Foreign tourism declined 25% in July. The slump is indicative of the impact that more crucial sectors will feel.
Earlier this month, Governor of the Bank of Israel, Karnit Flug, said the current conflict would cost the economy around $1.44 billion. Speaking to Channel 10, Flug said: "The assessment is that it can reach up to around 0.5 percent of GDP, which is up to 5 billion shekels."
Ratings agency Fitch’s director of sovereign ratings Paul Gamble said the budget deficit target for the year is likely to be missed. This was in consonance with views expressed in Bank of Israel’s monetary report that the government would be unable to meet its deficit target of 2.5% of GDP without raising taxes or postponing government expenditure.
Defense Cuts Elusive
Greater concern was expressed by Gamble about the future impact of sustained defense spending. If conflicts of this nature occur at regular intervals over the long term, a reduction in defense spending was unlikely. Taken together with a decline in domestic demand, this phenomenon has the ability to affect the economic outlook for the country.
The Bank of Israel has lowered its interest rate significantly in an attempt to boost domestic demand. It has also emphasized that a diplomatic settlement could lift the economy. Flug said: "The potential of a diplomatic settlement for helping growth is clear, and it's also clear that a settlement could have helped." As of now, a long term settlement remains elusive, endangering growth prospects for the country.
Here we will list 3 Israel stocks that may witness further downside due to these factors. These stocks have witnessed downward estimate revisions recently. Moreover, share prices for each of these stocks have also declined considerably. These stocks carry either Zacks Rank #4 (Sell) or Zacks Rank #5 (Strong Sell).
magicJack VocalTec Ltd. (CALL - Free Report) provides software-driven solutions for the deployment of next-generation, IP (Internet protocol)-based international and long-distance telephony networks and related enhanced services.
The company provides routing and business powering enhanced services. Its services include International and Long-Distance Calling, Voice VPN (virtual private network), Calling Card, Exchange Carriers and Voice-enhanced e-commerce. The stock holds a Zacks Rank #5 (Strong Sell) and earnings for the current year are projected to fall 69.3%.
Estimate Revision – magicJack has seen 1 negative revision in the last 30 days for the current quarter and current year estimates. Quarterly earnings consensus has declined from 32 cents a share to 15 cents a share. Yearly earnings consensus has dropped from $1.27 a share to 84 cents.
Share Price – The stock has lost 10.8% over the last four weeks.
RRSat Global Communications Network Ltd. provides global, comprehensive, content management and distribution services to the rapidly expanding television and radio broadcasting industries. Through its proprietary RRsat Global Network, RRsat is able to offer high-quality and flexible global distribution services for content providers.
RRsat's comprehensive content management services include producing and playing out TV content as well as providing satellite newsgathering services (SNG). RRsat concurrently provides these services to more than 425 television and radio channels, covering more than 150 countries. The stock holds a Zacks Rank #4 (Sell) and earnings for the current year are projected to fall 26.7%.
Estimate Revision – RRSat has seen 1 negative revision in the last 30 days for the current quarter and for current year estimates. Quarterly earnings consensus has declined from 11 cents a share to 7 cents a share. Yearly earnings consensus has dropped from 44 cents a share to 33 cents.
Share Price – The stock has lost 13.9% over the last four weeks.
Enzymotec Ltd. (ENZY - Free Report) manufactures medical foods and ingredients. Enzymotec’s range of products are targeted at the consumer wellness and health segment and marketed to renowned global companies. The company operates through two segments, VAYA Pharma and Nutrition.
Enzymotec provides specialty lipid-based products and solutions. It serves pharmaceuticals and nutrition industries worldwide. Enzymotec, Ltd. is based in Migdal HaEmeq, Israel.
The stock holds a Zacks Rank #4 (Sell) and earnings for the current year are projected to fall 36%.
Estimate Revision – Enzymotec has seen 3 negative revisions in the last 30 days for the current quarter and 4 negative revisions for current year estimates. Quarterly earnings consensus has declined from 22 cents a share to 4 cents a share. Yearly earnings consensus has dropped from 82 cents a share to 38 cents.
Share Price – The stock has lost 37.2% over the last four weeks.
Most analysts believe that the current conflict will not have a long-term impact on the economy. Israel has experienced such troubles earlier, only to recover within months. The country has grown at around 3-4% over the last few years. Moreover, foreign investors remain interested in its hi-tech sector.
However, a diplomatic resolution to the ongoing conflict would go a long way in brightening the economic outlook. As of now, it may be a good idea to drop these stocks from your portfolio.