Hapoalim downgrades Elbit Systems

Elbit artillery

Bank Hapoalim has changed its recommendation from "Market outperform" to "Market perform," but raised its target price for the stock to $170.

Elbit Systems' orders backlog is at a record high, its sales are projected to grow in the coming years, and its profit margin is expected to improve. Now that the company's share price has surged, however, Bank Hapoalim believes that while the company is excellent, its share is fully priced.

Analyst David Levinson has lowered his recommendation for Elbit Systems' share from "Market outperform" to "Market perform," after having recommended "Market outperform" for over a year, during which the share price climbed 40%. While downgrading his recommendation, Levinson raised his target price from $150 to $170, 3.2% higher than the current market price. Elbit Systems' market cap on Nasdaq is $7.3 billion.

"Elbit Systems is active in the sector of advanced weapons systems for intelligence, surveillance, electronics, and airborne systems. The worldwide expansion in defense budgets focuses on these systems. Through Cyberbit, Elbit Systems is also active in cybersecurity, a field growing at over 10% annually," Levinson writes, adding that both Europe and the US are enlarging their defense and homeland security budgets, and will do so even more in the future, given the increase in terrorism in Europe and US President Donald Trump's policy of increasing the US defense budget by $100 billion in the next two years. Levinson also mentions the US administration's demand that NATO countries should raise their defense spending to 2% of GDP, a target that most of these countries currently fail to meet. Levinson cites Elbit Systems' last two acquisitions: IMI Systems for NIS 1.8 billion and Harris Night Vision for $350 million. "IMI Systems has a great deal of synergy with Elbit Systems' activity, but its sales constitute 15% of Elbit Systems' sales, and it is on the border of profitability," Levinson writes. According to Levinson, Elbit Systems' management believes that IMI Systems will make a profit in 2019, and that its sales will double the sales of Elbit Systems' land warfare department this year, with a focus on exports, since only 14% of IMI Systems' revenue comes from exports, while exports account for 80% of Elbit Systems' revenue.

Writing about Elbit Systems' recently completed acquisition of Harris, Levinson says that it will improve Elbit Systems' positioning in the night vision segment of the US market.

Comparing Elbit Systems to US defense industry companies, Levinson states that Elbit Systems is currently traded at a 42.2 historic p/e ratio (25.3 adjusted and excluding one-time expenses), while its p/e ratio for 2019 will be 28.6 (26.8 adjusted). The historic average p/e ratio for the defense industry is 17.2, but given the growth in defense budgets and the low interest rate environment, the p/e ratio has risen to 23.6 in recent years. "It follows that by any measures for the share, it is traded above the multiples for the industry, and the industry is traded at higher than its average multiple," he writes. He predicts that p/e ratios in the industry will remain high in the short term.

"The short-term orders backlog (until the end of 2020) is at a peak in comparison with the corresponding period last year, with revenue growth of over 20% in 2019," Levinson asserts. "We believe that the company's sales will continue growing, given Elbit Systems' improved standing in the emerging Asian markets, sales growth in Europe, and strong growth in the US defense budget, starting in 2016, which will continue to affect orders in 2019. Despite the increase in the short and long-term orders backlog and projections of better profit margins in the coming years as IMI Systems is integrated, our recommendation for the stock falls for pricing reasons."

Elbit Systems reported today that it had won an $85 million contract from the US Navy.

The analyst has no personal interest in the subject of this analysis. , Bank Hapoalim has no interest in the subject of this analysis. This analysis does not constitute a substitute for advice that takes into account each person's individual circumstances and needs.

Published by Globes, Israel business news - en.globes.co.il - on September 26, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Elbit artillery
Elbit artillery
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