Elbit Systems (Nasdaq: ESLTF)'s share has surged 19.9% on Nasdaq since September 11. After the publication of the company's good, although not outstanding, third quarter results today, it appears there is a more than reasonable chance that the upward trend will continue. Elbit Systems, which upgrades military platforms and develops and manufactures electronic and electro-optical military and military-derived products, is likely to benefit from the new security situation created, following the terrorist attacks in the US.
Meanwhile, the company continues to report good results in its business. Elbit Systems' third quarter revenue totaled $188 million, a 12.7% increase compared with the corresponding quarter last year. The increase is mostly due to sales of airborne products and electro-optical systems. Airborne systems sales amounted to $83.8 million in the third quarter, a jump of almost 40%, compared with the third quarter of 2000.
A breakdown of company sales by geographic area indicates very substantial growth of sales in Israel. 31% of Elbit Systems' third quarter sales were to the Israeli market, compared with 23% in the corresponding quarter last year. The rising proportion of sales to Israel is at the cost of sales to the US (27% in the third quarter, compared with 34% in the third quarter of 2000) and Europe (16%, compared with 23%). Sales to other countries accounted for 26% of Elbit Systems' sales in the quarter, compared with 20% in the corresponding quarter last year.
Elbit Systems' gross profit totaled $53.7 million, up 15% from the corresponding quarter last year. The rate of gross profit also rose, thanks to changes in the company's sales mix, among other reasons.
Operating profit amounted to $12.4 million, 6.7% of revenue, compared with $14.1 million in the third quarter of 2000. This decline is attributed to higher marketing expenses and expenses connected with the employee phantom options plan. Apparently, the higher the Elbit Systems share rises, the higher the company's management and general expenses will be in the coming quarters, which will certainly affect its net profit. Elbit Systems explains the $43.7 million third quarter rise in marketing expenses by its merger with El-Op Electro-Optics Industries and by new orders, which require the investing of more resources than previously.
Elbit Systems' net profit in the third quarter totaled $13.2 million, or $0.33 per share, compared with $9.5 million, or $0.25 per share, in the corresponding quarter in 2000. This figure excludes various deductions for the El-Op acquisition. After deducting the extra cost, the company had an $11.3 million profit in the quarter, compared with $8.1 million in the third quarter of 2000. In view of its third quarter profit, the board of directors decided to distribute a $3 million dividend ($0.08 per share).
As of the end of the third quarter, Elbit Systems' orders backlog stood at $1.55 billion, 8% higher than at the end of the corresponding quarter last year. 69% of the company's orders backlog consists of orders from outside Israel, while 53% of the orders backlog is scheduled to be filled in either the fourth quarter of 2001 or 2002.
The Elbit Systems share is traded on Nasdaq at $18.68. The average profit forecast for the company stands at $1.28 per share, giving the company a 14.6 profit multiple for next year, which is reasonable, but not particularly low.
In any case, over a year after the merger between Elbit Systems and El-Op, it appears that Elbit Systems is busy hunting for another candidate for acquisition. Elisra Electronic Systems, owned by Koor Industries (NYSE: KOR), is a possible candidate. Elbit Systems president and CEO Joseph Ackerman has already stated that his company is interested in acquiring other companies, and added, "Some believe that a merger with Elisra would be a good idea."
Today, Ackerman denies any negotiations with Koor regarding Elisra: "In view of the fairly successful merger we underwent with El-Op, we are preparing for our next step, but there are no negotiations concerning the acquisition of Elisra at the moment."
"Globes": Have you been contacted?
Ackerman: "We haven't been contacted, either."
How would you sum up your third quarter results?
"All in all, the results were according to plan. We have also continued to increase our orders backlog in this quarter also. At the same time, we have much left to do in the restructuring area. We've taken some restructuring measures this quarter, but not enough. We'll have to do more in the future."
What restructuring measures will you take?
"We have to continue to improve our work processes. Despite the growth in our orders backlog, we'll recruit as few employees as possible. We'll also save on our other expenses."
Will the rise in sales in Israel in the third quarter continue?
"No, I don't think so. We regard this as a somewhat cyclical phenomenon. Average yearly sales in Israel will remain stable. In general, we don't think the balance between sales regions will change."
Have your target markets changed since the terrorist attacks of September 11?
"Yes, there has definitely been a change in attitude around the world towards the defense industries, which is reflected in three ways. We see a trend towards more efficient closing of transactions, which shortens the process. Furthermore, there is talk about changing priorities, with priorities being diverted within defense budgets. In addition, defense budgets may shrink, due to the global economic slowdown. We'll see how these changes affect us. Where we are concerned, we're bound to benefit from the new situation."
Over how many years will the revenue from winning the tender for the future US fighter pilot helmets be spread?
"Sales will be spread over a great many years. At the same time, we are offering a leading technology, so I believe other parties will be interested."
Do you have a forecast for next year?
"We have a large orders backlog. If we adopt the right restructuring measures, we'll have a good year. The challenge facing us is to continue our restructuring measures."
Published by Israel's Business Arena on November 6, 2001