Since the start of the Israel-Hamas war on October 7, the Tel Aviv 35 Index has fallen by over 10%, with more and more companies reporting on the expected negative impact of the fighting including tourism, aviation and retail companies as well as companies located in the Gaza border region.
However, the 10 companies traded on the Tel Aviv Stock Exchange (TASE), engaged in the development and production of defense products and systems, some of which have even reported new orders, due to the war, have bucked the general downward trend on the market. Since the outbreak of fighting, some of the stocks have stood out with sharp share price rises.
Aerodrome Group Ltd. (TASE: ARDM), which uses drone technology to gather, analyze and process data for advanced digital-based AI insights has more than doubled its share price since the start of the war and is currently trading at a market cap of NIS 68 million.
Aerodrome recently reported a new order worth $1.5 million to immediately supply drones. The company said the order was placed by a defense customer and the supply was made from existing inventory. "The company's management anticipates continued supplies of substantial volumes, or that may accumulate to substantial volumes during the current quarter," the company reported last week.
Another stock that has climbed because of the war is Thirdeye Systems (TASE: THES), which increased by 63% since October 7 to a market cap of NIS 72 million. The company manufactures and markets electro-optical systems for object detection, for drones and vehicles. This week the company reported a commitment to purchase dozens of its defense systems from a domestic customer, worth NIS 13.5 million, with an option to increase the order by NIS 1.5 million. Thirdeye said, "These systems were developed and adapted for end customers to deal with the current and future challenges of the battlefield, in the face of the threat from drones." The company is working to supply the systems as part of the war "while meeting many challenges." Another company with new orders since the start of the war is Next Vision Stabilized Systems (TASE: NXSN), which develops and manufactures stabilized cameras for aircraft (drones and drones) and vehicles. The company's share price has risen by only 1% since the start of the war, but since the start of 2023 it has shown a three-digit return, and has risen bby 220% over the past year. The volume of orders is worth NIS 20 million, and Next Vision has a market cap of almost NIS 2 billion.
"In the US a wave of defense budget rises is beginning"
Psagot senior analyst Shahar Carmi says it is difficult to establish a rule of thumb regarding the relationship between conflicts and defense stock returns. He analyzed an ETF in the US that includes defense and aviation companies, and found that there was no clear correlation between its performance and military conflicts: "There is logic that in times of conflict there will be an emphasis on these companies and their better performance, but it is impossible to say with certainty that if an event started, this is the direction. Each case must be judged on its own merits, also in terms of the length of the conflict and the defense budgets."
In general, Carmi points out that over 40% of the world's defense budgets are in the US, followed by China, which is not relevant to players from Israel, followed by Europe. He says, "The increase is not a jump, but an order of magnitude of 5% per year, but there was a downward trend until a few years ago and it reversed. Europe also has a positive cycle for the industry, because what happened in Ukraine has turned on red lights there. Defense companies that turn to these markets have potential for increases. It should also be said that at the beginning of the year, the arms and defense companies performed less well than the S&P 500 index, and some of them are at relatively favorable prices today."
Elbit has fallen but will profit from the situation"
Another stock that has performed strongly since the start of the war is FMS Enterprises Migun (TASE: FBRT), which develops and manufactures ballistic protection materials as a raw material for personal protection and vehicle protection products including flak jackets to protect from light weapons bullets and ballistic vehicle protection. FMS's share price has risen 14% since the start of the war and has a market cap of NIS 1.2 billion. The company is controlled by the Blum family which has a 66.6% stake.
Aryt Industries (TASE: ARYT) has seen its share price rise 12% since the start of the war. The company develops, manufactures and markets electronic fuses for shells and electronic military products and is traded at a market cap of NIS 221 million. Carmi says that shells are flying all over the place and this can only benefit Aryt Industries.
Ashot Ashkelon (TASE: ASHO) controlled by FIMI, has seen its share price rise modestly since the start of the war. The company manufactures metal aviation parts, heavy metal products and systems for armored combat vehicles.
Leonardo DRS (TASE: DRS), which last year acquired Israeli tactical radar company RADA Electronics, (which recently announced it is delisting from the TASE), has risen 22% since the start of the war. The company has a market cap of NIS 19.8 billion.
However, RSL Electronics (TASE: RSEL), which develops and manufactures control, diagnostics and prognostics systems for aerospace, marine and land applications has lost 9% since the start of the war and Orbit Technologies (TASE: ORBI), which provides airborne communications and satellite- tracking maritime and ground-station and new space solutions, has lost 11%.
Israeli defense electronics giant Elbit Systems (Nasdaq: ELST; TASE: ELST) has fallen 3% since the start of the war but is up 36% since the start of 2023 with a market cap of NIS 34.3 billion.
Carmi says, "Mainly the big companies on the local stock market have been hit, and it could be that foreigners are selling what can be sold and Elbit is easy to sell because it is big. Elbit also has relatively expensive pricing compared to companies in the field in the US. I think Elbit is very interesting. It will benefit from the dollar strengthening and will see higher profitability at the end of the year and next year. There is also the fact that it is now necessary to rearm. Elbit has a very high potential, and currently it doesn't look that expensive either."
Published by Globes, Israel business news - en.globes.co.il - on October 24, 2023.
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