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Checkpoint Systems, Nice Systems, Tech Sector Boost Israeli Currency Despite War

Stocks in this article: CKP NICE ESLT

NEW YORK (TheStreet) -- The ceasefire between Hamas and Israel ended today when rockets were fired again at Israeli cities close to the Gaza strip. And peace talks in Cairo ended after the Israeli delegates didn't accept Hamas's terms to commit to open an airport and sea port in Gaza in the future.

Despite the ongoing war, the Israeli currency -- the New Israeli Shekel -- remains strong against leading currencies such as U.S. dollar and euro. What keeps the Israeli currency strong? And will it remain robust?

For one, Israel's strong tech industry continues to thrive, with companies such as Checkpoint Systems (CKP) and Nice Systems (NICE).

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Nonetheless, these companies didn't perform well yesterday, as shares of Checkpoint Systems took a nose dive and fell by 3.5% to $13.56 a share. Nice Systems also shed 29 cents to settle at $39.20.

Israeli defense companies such as Elbit Systems (ESLT) have benefited from growing demand for their stocks as development in the region could improve their bottom line. Shares of Elbit rallied since the fighting started on July 8 by 2.5% to $60.86 a share (this includes yesterday's sharp drop of 2.5%).

The other issue is the Israeli cash rate, which remains relatively high compared to other leading economies. The U.S. cash rate is at 0% to 0.25%, and the European Central Bank lowered its cash rate to 0.15% and its deposit rate to a negative 0.1%.

Bank of Israel, however, is trying to devalue the New Israeli Shekel in order to support Israeli exports. This includes cutting down the cash rate by 0.25 percentage points to 0.5% -- the lowest level since August 2009. BOI also purchased $400 million in the foreign exchange markets Thursday.

This purchase isn't a new strategy and has been employed by the BOI for the past several years. Moreover, since the beginning of the year the bank increased its foreign currency reserves by 6.5%.

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The recent war is estimated to cut down the Israeli GDP by 0.5% in 2014, according to Bank of Israel's Governor Karnit Flug. Further, the rise in Israel's defense expenses is likely to force the government to raise taxes in order to maintain the government's deficit target of 2.5%. The rating agency Fitch already estimates Israel's incursion to Gaza could cause the government to miss this target this year.

Looking forward, if the Israeli economy continues to weaken because of the war and the adverse impact it has on the economy, and Bank of Israel takes additional measures to devalue the NIS with more rate cuts and purchase USD, these developments could eventually lead to a weaker shekel.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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TheStreet Ratings team rates CHECKPOINT SYSTEMS INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate CHECKPOINT SYSTEMS INC (CKP) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CHECKPOINT SYSTEMS INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, CHECKPOINT SYSTEMS INC continued to lose money by earning -$0.04 versus -$3.37 in the prior year. This year, the market expects an improvement in earnings ($0.79 versus -$0.04).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Electronic Equipment, Instruments & Components industry. The net income increased by 98.3% when compared to the same quarter one year prior, rising from -$7.42 million to -$0.13 million.
  • Despite currently having a low debt-to-equity ratio of 0.35, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Despite the fact that CKP's debt-to-equity ratio is mixed in its results, the company's quick ratio of 1.63 is high and demonstrates strong liquidity.
  • Net operating cash flow has decreased to $8.56 million or 34.34% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • CKP's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 28.84%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Despite the heavy decline in its share price, this stock is still more expensive (when compared to its current earnings) than most other companies in its industry.

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