Elbit Systems, It's Time To Go Long
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.
Disclosure: more
Good read, thanks. Would have totally missed this article if not for seeing this interesting comment stream on the homepage.
Thanks for reading Carl, I find the comment streaming function of the homepage very interesting and great for helping users find articles.
Thanks, it's tough to find good coverage of #ELBIT. I am long $ESLT myself and having a strong Israeli government in power bodes well for the stock. I can't decide if I like Lieberman though. He reminds me of Trump - tough, says it like it is, but lacks a filter.
Thanks for reading Danny, glad you enjoyed the article. I also found that there was little to no coverage on this stock which is why I put out this article. Time will tell on Lieberman.
Don't get me wrong, while I think Lieberman sometimes speaks without thinking, I like that he's tough and think that will be good for both Israel, the entire Middle East and the defense industry. For example, I heard he's opposed to releasing terrorists bodies. Good, why let murders get a hero's funeral, and that's better than collective punishment.
That's precisely why he'll make a better Defense Minister than Foreign Minister. Israel is in a dangerous neighborhood and you need to be strong. But Leiberman's sharp tongue hand a tendency to insult the more sensitive nature of western world leaders.
I don't know much about Lieberman, but he sounds like Trump and what will happen if he wins. He'll manage to offend every country on Earth while saying "they all love me, everyone loves me."
I love this new activity feed on the homepage by the way. Takes me right to where the action is!
I once read in a history book that while under British rule, there had been a spat of terrorist attacks. The British responded by burying the terrorists wrapped in pigs' remains. Islam believes this prevents them from ascending to heaven and claiming their 70 virgins.
Unfortunately Israel is more concerned with world political opinion than protecting it's own citizens. Lieberman is Russian and they don't take crap from anyone, so perhaps this will change.
Wow, that's quite a way to diss somebody, who would have thought the Brits had it in them! Anyway, I have to disagree, I think the Israelis have been pretty straightforward in best interest of its country and citizens instead of inaction due to a fear of Political Correctness (like our country does). Although, I do agree with you on the Lieberman part. As an ethnic Russian, he is going to elevate the "I don't take nothin from nobody" approach.
I didn't mean to imply Israel does not care about it's people. I just think they are held to a higher standard than any other country so are often held back from doing what's need to protect it's people. Could you imagine the US being told to not respond if missiles were landing on its people? No, and they would respond by bombing the hell out of the country that did it. Israel could, but instead chooses to send its troops into harms way for more surgical strikes - attempting the nearly impossible task of targeting only the terrorists hiding amongst the populace.
But what do I know, unlike Sanders, I don't claim to be an expert on Israeli foreign affairs just because I took a vacation there as a kid.
Ahh gotcha Barry. I totally agree with the re-statement/clarification. I always try to explain the same point that you just made to people. If mortar shells were being fired from Canada at NYC, or from Mexico at Dallas, would you not expect us to strike back?
Very tough. We need somebody like him in the US. I agree re: the bodies. Also, I love that they bull doze / demolish the family house of the terrorist. Destroying their place of living, as well as a huge piece of the terrorist's family economic capital should help be a deterrent. Although knowing them it probably isn't because the cause > family.
This is actually largely ineffective since anyone who has their house demolished tends to get large payments from Hamas, Iran, etc. Saddam Hussein was big on this - he'd send what amounted to a small fortune in Palestine to the families of suicide bombers. This unfortunately led some people to murder innocents for the financial incentive rather than any ideological belief. Money from #oil and even narcotics often ends up funding terrorism.
Not sure if the amount they get is enough to buy a house or not. Regardless, it sends a message.
They'd both fare better if they were able to keep their racists views to themselves! I fear for this country if #Trump wins since I'm convinced he'll embroil us in unnecessary wars. That being said, $ESLT would likely benefit.