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Elbit Systems: Here to Stay

The largest privately owned defense company in Israel, and a preferred supplier of American behemoths Boeing and Lockheed Martin, among others, Elbit Systems is a world leader in unmanned aerial vehicles, electro-optics and advanced military systems.

Credibility of arms manufacturers relies upon the actual deployment of their devices; Elbit’s are active on the battlefield year-round, both in domestic and foreign markets.

The company is led by chairman and main shareholder Michael Federmann – one of the most influential businessman in Israel – assisted by highly respected CEO Joseph Ackerman. Both have been masterful in driving international expansion.

Traditionally fragmented, the Israeli defense industry appears rife for consolidation.  The three largest players – state-owned IAI and Rafael, then Elbit – should emerge stronger than ever once this process reaches completion.

Punished by the sovereign crisis in Europe and the United States, where financially distressed governments are expected to cut budgets – if not go through an outright “shutdown” in the U.S! – Elbit’s market value has melted to less than $1,5 billion.

The company now trades at x0.5 revenue and 10x GAAP earnings, the latter regarded as a conservative assumption of earning power since depreciation and amortization remain consistently higher than capital expenditures.

Contrarian view: I do not expect the United States, Israel or Europe to decrease their defense budgets; on the long run, I expect the contrary. Accurate growth prospects may be hard to figure, but tailwinds seem obvious in each of the markets adressed by Elbit, as militaries develop their high-tech arsenals.

Cheaply valued, soundly financed, the company sports an outstanding know-how and a comprehensive portfolio of battle-tested systems. In that respect, it seems ideally positioned to capture future opportunities once the storm passes.

(Long ESLT at an average price of $39 a share. No opinion or partisanship in the current conflict in Palestine.)

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