When war broke out between Russia and Ukraine in early 2022, the Israeli defense electronics company’s stock price soared Elbit Systems Limited (Nasdaq: ESLT; level:ESLT) rose amid expectations of an increase in European defense budgets. Less than two years later, war broke out in Israel, but Elbit’s stock price continued to fluctuate for months, while other defense companies traded on the Tel Aviv Stock Exchange (TASE) by tens and even hundreds of percent.
However, over the past six months, Elbit’s stock price has gained upward momentum. Since the end of June, the company’s stock price has jumped nearly 70% to all-time highs, giving it a market value of $13.3 billion.
On Wall Street, Elbit Systems became the fourth most valuable Israeli company after Teva Pharmaceuticals and cybersecurity companies Check Point and CyberArk. In recent weeks, Elbit has outperformed Mobileye, Wix and NICE.
Elbit has been run for more than a decade by CEO Bezhalel Machlis. The controlling shareholder in the company is Michael Federman with a 43.9% stake currently worth $5.8 billion.
As of today, there are no other parties with an interest in the company, but in previous years the Canadian Bank of Nova Scotia owned more than 5% of Elbit Systems shares through its asset management subsidiary, but sold a significant portion of its stake amid anti-Israel protests. Which put pressure on Elbit shares, especially in early 2024. After the bank sold most of its holdings, this pressure appears to have eased. According to the latest report, at the end of the third quarter, the Canadian bank owned 1.25% of Elbit shares, compared to 4.2% at the end of 2023.
The ceasefire will have no effect
What led to the stock surge, and what to expect now that the ceasefire is in effect? “Elbit is up because the business environment is very positive and strong. We are seeing an increase in defense budgets in many countries and an increase in defense procurement – of course also in Israel with a jump in volume,” says Ilya Viner, analyst at Leader Capital Markets. From Elbit’s deals with the Ministry of Defense.
“Now, with Trump taking office as President of the United States, he is pressuring NATO countries to increase their budgets from 2% to 4% and even 5% (NATO countries are obligated to invest 2% of their GDP in the budget, and now Trump is talking about increasing the target). This raises expectations in the market for continued strength in the business environment and for Elbit to receive more orders.”
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It is believed that even with the ceasefire, Elbit will continue to operate strongly. “We do not expect the ceasefire to lead to a slowdown in procurement, on the contrary, it will continue and intensify. The Ministry of Defense signed a contract worth one billion shekels with Elbit to establish a new factory that will reduce dependence on production abroad, even if the war in Ukraine ends.” – which is not currently on the horizon – the understanding is that we are heading towards years of resupply and a positive cycle in the defense sector, which will lead to an increase in Elbit’s results in the coming years.”
In this context, Weiner adds that the war in Israel represents fertile ground for Elbit’s developments, and he estimates that its products will enjoy higher demand because they have been “successfully tested” and “proven themselves on the battlefield.” “Elbit is trading at a higher multiple than the sector because it is also exposed to Europe and Israel, and companies with exposure to Europe can benefit significantly from the increase in defense budgets and scope of activity, because countries on the continent have been investing less in previous years.”
“Constraints – Production Capacity”
Weiner also mentions the improvement in the company’s profitability. Elbit previously set an operating profitability target of 10% in 2026 (compared to 8% in the first three quarters of 2024), and “the market recognizes that the business environment supports these goals.” In addition to operating profitability, Elbit has also set a revenue target of $7 billion for 2026 and the company has already estimated that it will be able to meet and achieve the goal this year.
According to Weiner, “What is currently limiting Elbit is not the volume of demand – if it can produce and sell what customers need, it will easily exceed the target – but its production capacity. The company is expanding it, has invested in it and continues to invest in large quantities and we believe it will reach the revenue target.” $7 billion as early as 2025.
But all of this, he says, is already priced into the stock: “The market is pricing in continued gains in results, and to justify further upside, we would like to see a more significant improvement in profitability, significant new gains, or progress on projects like lasers (for air defense “) Despite this, Weiner believes the positive sentiment is expected to continue.
“He will achieve ambitious goals.”
Oppenheimer also recently estimated that Elbit may be ahead of schedule in achieving its business goals, both in terms of revenue and operating profitability. In the company’s third-quarter financial report published in November, Elbit reported a record backlog of orders that rose by $1 billion to $22.1 billion in the quarter, along with revenue of $4.9 billion in the January-September period (12.6% growth) and net principles Generally accepted accounting. Profit of $272 million
“We believe Elbit may achieve the aforementioned revenue target ($7 billion) as early as 2025, due to an exceptionally large and growing order backlog, with the completion of new manufacturing plants in Ramat,” Oppenheimer analyst Omri Evroni wrote after the report. Becca and Modiin expect to accelerate the future growth rate in revenues.” He added that the level of capital expenditure is expected to remain steady after the company completed significant investments in upgrading its ERP system and setting up the plant in Ramat Pika, which he believes will boost free cash flow in the future.
Oppenheimer (i8n Nov) raised Elbit’s price target to $280, maintaining an “outperform” recommendation. The target price at the time was 13.6% higher than the stock market price, but the stock price has since continued to rise and has already surpassed it.
“The impressive growth in backlog of orders supports expectations of accelerating the rate of revenue growth, in parallel with improved rates of profitability and cash flows,” Evroni noted at the time. “Elbit excels in growth rates and profitability that are considered exceptional for the defense industry in light of technological innovation and diversification among a group of Domains.
He added that sales in Israel grew significantly by 116% due to the war and the large demand for weapons from the Israeli army, while revenues from Europe decreased by 13% due to prioritizing the supply of weapons to Israel.
Published by Globes, Israel Business News – en.globes.co.il – on January 21, 2025.
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