What's Hurting These Companies?

Is it the turmoil in Israel's streets or just the fact that their potential is limited?
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For all the escalating violence and headlines, the hi-tech help wanted pages in Israeli newspapers over the weekend were as bloated as usual. One particular series of particularly elaborately designed ads stood out against the crowd. "Don't miss this opportunity," was the message conveyed by

Ofek The New World

, hoping to recruit a few dozen engineers and technicians.

What is Ofek, anyway? It's the domestic wireless telecom service provider launched by

Eurocom Communications

. Eurocom is owned by Shaul Elovitch and the Arison family. Ofek is positioning itself to become the chief competitor of

Tel Aviv Stock Exchange

-traded

Bezeq

in the domestic telecom arena, with the help of LMDS wireless technology, which can be quickly and easily deployed to subscriber homes.

Elovitch certainly entertains high hopes for his new communications venture, but both Elovitch communications companies traded on Wall Street,

Internet Gold-Golden Lines

(IGLD) - Get Report

and wireless service provider

Partner Communications

(PTNR) - Get Report

, have dived to all-time lows this month. Internet Gold, in which Eurocom holds the controlling interest, is Israel's biggest Internet service provider. Last night its stock sank below $4, meaning a market cap of a mere $71 million.

Surprise!

Ron Lubash, the managing director of the Israeli branch of

Lehman Brothers

took the investment industry by surprise when he issued Internet Gold on Wall Street. After a cool welcome, American investors discovered the stock and by March, Internet Gold had surged to a market cap of more than $500 million.

Last week Lehman Brothers cut its revenue forecast for Internet Gold, citing heavy competition in the Israeli Internet sector. The investment bank lowered its 2000 revenue forecast from 195 million shekels to 185 million, and cut its 2001 forecast from 285 million shekels to 267 million. (The shekel is worth about 25 cents.). It set a price target of $15 a share. You don't need a chart to figure out what its current level of $71 million is doing to the pricing of Internet Gold's local archrival,

NetVision

, even though Lehman believes that Internet Gold is still trading at a discount relative to the sector.

Meanwhile, Partner Communications also dived to an all-time low, sinking to $7. Eurocom holds 10% of its equity. The company is now valued at a billion dollars. That doesn't sound too pathetic, until one remembers that just seven months ago Partner was trading at a market value of $3.5 billion. In other words, Eurocom has seen the value of its investment shrink from $400 million to $100 million. P/>Neither of these two Elovitch companies are Internet-oriented. They are not dot.coms, they are communications and infrastructure companies. They have equipment, hardware, wires, service divisions, hundreds of thousands of satisfied customers and, of course, revenues. Hence the drop in their stock value is not part of the global Internet crash. Their future looks pretty good, even if both are still losing money.

Big fish in tempestuous small pond

The element both companies lack is international potential, for all that

Dresdner Kleinwort Benson

commenced coverage of Partner on Oct. 3 with a buy. They may both trade on Wall Street, but they're no

Check Point

,

ECI Telecom

or

Teva Pharmaceuticals

, whose revenues are generated almost entirely by exports.

Internet Gold and Partner are local companies. They operate exclusively in Israel. True, Internet Gold is trying to expand with ventures in Greece and Croatia, but the majority of its business is at home. Partner is confined by the boundaries of Israel, a small country with a small population.

It could also be that American investors have grasped that these are "Israeli" stocks, with exclusively "Israeli potential" and that they are tightly linked to developments in the Holy Land. And since events in the Holy Land do not look good right now, they are selling these stocks.