Summary: A sudden change in the political landscape is bullish for the Israeli Defense Sector. That, combined with the expanding drone industry, will benefit Elbit Systems.
The drone industry is expanding.
ESLT will benefit from both a changing political landscape, and the need for more drones.
If you haven't initiated a position in Elbit Systems (NASDAQ:ESLT) yet, now is the time. I mentioned it briefly in another article regarding Geopolitical Analysis, but I am going to take a more in depth look here.
Elbit Systems is an Israeli Defense company that provides a robust suite of products in a variety of sectors such as aerospace, land and sea, and computer electronics. They are also greatly involved in the growing sectors of reconnaissance ("C4ISR") and unmanned aircraft systems (UAS), which was formerly known as UAV and more commonly called a "drone" today. Elbit Systems is a global company doing business in The United States, Europe, and South America. They are most famous for their drones, and I believe that drones (along with cyber security) are going to be the preeminent method of warfare going forward. This is fantastic for Elbit Systems, because PWC believes the drone market could reach $127B by 2020.
Besides fundamentals and technicals, the exciting news announced two nights ago has me very bullish on the Israeli defense sector. It was the election of the new Defense Minister in Israel.
(Credit: WSJ)
Avigdor Lieberman is head of the ultra-nationalist Yisrael Beitenu party of Israel. He was tapped by the Prime Minister Benjamin Netanyahu [Bibi] after a falling out with the prior defense minister about the political identity of the country. Bibi has continued to take the country on a path further to the right, which Moshe Yaalon (former defense minister) fervently disagreed with. To strongly solidify his ruling coalition, as a slap in the face, or possibly in accordance with his new agenda, Bibi has gone with a far right candidate for Defense Minister, which should be very bullish for the Israeli defense sector.
Lieberman is not a natural born citizen, growing up in the former Soviet Union. He grew up in a wealthy Jewish community and ended up emigrating to Israel with his parents at 20 years old. Lieberman represents the affluent Russian conservative minority in Israel.
Fundamentals
Elbit continues to perform extremely well. EPS is up .18 cents, revenue is up 14.6m, and the backlog has increased another 500m. The company currently sports a 1.5% dividend, which is welcoming to those looking for dividends in addition to growth. It also trades at a P/E of 20, which is right at the industry average. The increase in both backlog and Free Cash Flow will be beneficial to both the company and investors as they use the cash for R&D, as well as share buybacks and dividend increases. As you can see below, Elbit Systems has been steadily increasing its FCF for the last 10 years, and it looks like they will continue to do so.
(Source: gurufocus)
According to the Stockholm International Peace Research Institute [SIPRI], Elbit Systems is the second largest defense company in Israel behind Israel Aerospace Industries. However, Israel Aerospace Industries is a private company, making Elbit Systems the largest investable Israeli defense company. The election of a ultranationalist is expected to be highly beneficial to the defense sector in Israel as the far right is usually associated with higher defense spending. The best way to play this development will be by investing in ESLT. While nothing is assured, and Lieberman hasn't yet called for an immediate increase to the defense budget, he is known for making inflammatory statements concerning the beheading of disloyal Israeli Arabs, the dismissal of a possibility of a Palestinian State, the ridicule of an ineffective UN Security Council, and military superiority.
Technicals
(Source: Stockcharts)
Elbit Systems has been on a nice trend upward. While it has had several corrections, the important thing to note is that it strongly held support at the 200 day moving average (the red line). Right now, it is looking to hold above the 50 day moving average (the blue line), and I believe an increasing backlog of orders (Elbit recently received a $40m order to supply advanced tactical communications systems in Europe) along with the news of the defense minister will send this stock to new highs.
The stock has also performed extremely well the last few years when compared to the three main US Defense Manufacturers (Northrop Grumman NOC, Lockheed Martin LMT, Raytheon RTN), coming in second only to Northrop Grumman.
(Source: Morningstar)
Risks
Although limited, there are some risks that investors should be aware of before investing. ESLT is a very illiquid stock trading at around an average of 31K shares. In the event of a large short or an event in where you are looking to sell your shares, this could become very difficult. During market downturns, investors rush to sell names they feel insecure about. This being one of the lesser known defense names, and an Israeli-based company, people may rush to sell this stock. There is also always a risk that sales decline and backlog decreases, but with a new ultranationalist defense minister, and growing international conflicts, I see this as a minute possibility.
Conclusion
My perspective on the defense sector continues to be bullish, and the future continues to look bright for ESLT. It is a buy now, or on the next market sell-off.
Comments
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