The war in Israel, the war between Russia and Ukraine, and the tensions in East Asia, will lead to Elbit Systems’ (TASE: ESLT; Nasdaq: ESLT) orders backlog climbing to levels never seen before, but the company’s main challenge is to generate a double-digit operating margin like other defense companies around the world, according to Meitav Brokerage analyst Elad Kraus.
Meitav has started covering Elbit Systems with an "Outperform" rating and a price target of NIS 900, representing a premium of 21.5% on the market price. Kraus says that the company is in the midst of a process that emphasizes improving profitability, after years of relatively low margins. Elbit Systems aims to reach sales of $7 billion and an operating profit margin of 10% by 2026. Meitav estimates that the sales target will be achieved in 2025.
"There is a permanent step up in defense budgets," Kraus writes, "and Elbit’s orders backlog is growing by more than the defense budgets." At the end of the second quarter, the company’s orders backlog was $21.1 billion, 31% more than at the end of the corresponding quarter of 2023.
Kraus adds that Elbit Systems benefits from a strong balance sheet that allows it to make significant investments and to finance working capital. Cash flow, however, is volatile, and customers do not pay in an orderly fashion, especially Israel’s own Ministry of Defense, he says. "That means higher financing costs, which impacts net profit," he adds. In his view, Elbit Systems will not increase its dividend, because of expected higher capital investment and debt repayments.
"Elbit is currently undergoing significant change, with high growth in its backlog and hence significant expected growth in revenue," Kraus writes. He sees the source of the company’s strength as lying in the diversity of its revenue sources and in not being dependent on a particular territory or segment.
Elbit Systems, headed by Bezhalel Machlis, has a market cap of $9 billion on Nasdaq, after a 6% decline in its share price so far this year.
Published by Globes, Israel business news - en.globes.co.il - on August 20, 2024.
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