Wars and conflicts tend to benefit the defense industry and after 10 days of the Israel-Hamas war, "The Wall Street Journal" reports that the share prices of the world's major defense equipment manufacturers have risen by 5%-17%.
But during that time the share price of Israeli defense electronics company Elbit Systems Ltd. (Nasdaq: ESLT; TASE:ESLT), led by CEO Bezalel Makhlis, has fallen by 2% on the Tel Aviv Stock Exchange (TASE) and by over 6% on Nasdaq. Elbit Systems share price is currently down 0.54% on Nasdaq at $194.13, giving a market cap of $8.746 billion.
What explains the weakness of the share? IBI Investment House research department head Lior Lublin says, "Over the past two or three years and even more Elbit has been traded at a more expensive multiple than other companies in the industry. This is mainly due to the fact that Elbit is a growing company, geographically dispersed so that it has no risk or specific geographic dependence, and relative to the giants of the industry, it is of medium size, when in this sense there is an advantage to being smaller. Elbit began the war with returns of over 35% since the start of the year, meaning it had widened gap. All these data meant that on the face of it, at the beginning of the fighting, Elbit came to the market a little expensive."
Lublin believes that the war is an event that has effected all sectors of the market. "Everyone in the Israeli market has been kidnapped. After all, there are foreign investors who invest in Israeli companies. At the moment the fighting started, the risk premium opened up and many investors rushed to get rid of everything related to Israel, no matter the price. For example, Israel's banks have been banks have been going through an amazing period with excellent results expected, and they still fell by 15%. In this respect, Elbit is no different. In shekel terms, it remained almost unchanged, so it did not fall like the rest of the Israeli market, and that says something about how investors look at Elbit's performance."
Lublin adds that it is still too early to understand the full impact of the security situation on defense companies in general, and on the performance of the shares of the other defense companies compared with those of Elbit. In general, according Lublin, "Defense companies are the only sector where war is a good thing."
He also mentions the weakening of the shekel as a positive factor for Elbit's results. Lublin explains that Elbit has major shekel expenditure, while its revenue is mostly in foreign currency, therefore the weakening of the shekel against the dollar and the euro should improve its financial results, which in his estimation will be reflected in the results of the fourth quarter of 2023.
Published by Globes, Israel business news - en.globes.co.il - on October 17, 2023.
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