Tuesday, December 10, 2019

A Current AIM International Equity Holding: Elbit Systems Ltd. (ESLT, $165.36): “Keep an Eye on Elbit for a Lil’ Bit”

Elbit Systems Ltd. (ESLT, $165.36): “Keep an Eye on Elbit for a Lil’ Bbit”
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.


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