By:
Manuel Cukaj, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Elbit Systems Ltd. (NASDAQ: ESLT) develops and supplies a broad
portfolio of airborne, land and naval systems and products for defense,
homeland security, and commercial applications. In addition, they provide a
range of support services.
• Integration of IMI-Acquisition
has proven to be profitable so far and more future synergies are expected to increase
value
• Strong backlog in Q2 of
2019 and many new contracts from a geologically well diversified customer base
• Acquisition of Harris’
night vision business further expands ESLT’s target markets and is the management’s
step towards further growth in the US
• Tensions in Middle East
and ease of cyber weapon export rules in Israel benefit Elbit Systems
• Hold it but watch it
closely!
Key
points:
Elbit Systems has been developing positively in the
past year.
The geologically well
diversified revenues are one of Elbit’s strongest assets. Exports dominate
their income as 80% of sales are coming from international customers with more
than 20% coming from the Unites States. Management aims to keep growing the
company in the long term through future acquisitions while especially targeting
the US market. At the end of last year, ESLT acquired IMI. The investment has
shown to be successful as it helped drive profit increases in the second
quarter, announced in August. More value comes from broadened target markets
and the ability to keep margins at a constant percentage. Additional synergies
are expected to increase the value of the acquisition in the future. In detail,
the Q2 results showed 19% YoY growth in revenue and constant margins driven by
the IMI acquisition. However, the bottom line was held back due to doubling financial
expenses to above $20 Million. Besides, a significant increase in backlog up to
$9.8 Billion compared to $8.1 billion at the same time 1 year earlier attracted
investors interest. More than half of those backlog contracts are to be performed
during the remaining months of 2019 and in 2020 and about 60% come from
international customers.
Following those reports, Elbit continued to recognize many
new incoming contracts including big international customers. A $38 Million contract
by the UK Ministry of Defense, a $85 Million contract awarded by the US Navy, $153
Million by an Army in Southeast Asia and a $50 Million contract by the
Portuguese Ministry of Defense Air Force portray the geologically diversified
customer base seeking for Elbit’s products and services. Recently, Elbit made
another acquisition and took over the night vision business of Harris, giving
the company a strong position in the US market. The subdivision already brought
new business for the company. This move is part of the long-term growth strategy
pursued. Investors will be taking a close look at how this new acquisition will
play out and to what deals management has in plan. Heading forward, defense spending
and a good relationship between the US and Israel are important factors for ESLT.
If Trump should accede a second tenure as president and if the recent tensions that
came up in the Middle East continue to be an issue, Elbit will be in a very
beneficial position to capitalize from those political and economic circumstances.
As Elbit is also very dependent on regulations of the Israel government it
comes very handy that they just eased rules on cyber weapon exports in August.
What
has the stock done lately?
Since the stock has been
added to Marquette’s AIM portfolio six months ago it has already gone through our
price target and is currently trading at around $164.00 (11/25/19 10:38am) in
all time high environments. After
constant growth in the past month the price has kind of plateaued since end of September.
Past
Year Performance:
ESLT
has generated a total year to date return of 46.36% and is now trading at the highest
prices it has ever reached since it has first been traded on the market. A 1-year
price chart can hardly look better than that. The increase was driven by a successful
integration of Elbit’s acquisition of IMI at the end of last year, strong growth
in revenues and a growing number of contracts bolstering the already increasing
backlog.
Source:
FactSet
My
Takeaway
The stock has generated
great returns for us so far and the company is well positioned to further grow.
The substantial backlog and the significant number of new contracts in the recent
months are good indication for Elbit to continue to prosper. The successful integration
of IMI and the recent acquisition show management is committed to grow the
company in the long term and acquire new businesses in order to get into new target
markets and expand their market share. Because of that I rate the security as a
hold.
However, an eye should be
kept on the price movements. Through the strong price increase in the past months,
relative valuation numbers skyrocketed (LTM P/E increased by ~1300 basis points
up to 42x since the stock was added to our portfolio in May) indicating that
the stock might not be underpriced anymore. We should watch the stock closely
and consider capitalizing on the gains in the near future if we believe the stock
price reflects the intrinsic value of the company.
Source:
FactSet
