Elbit Gains as Gaza Conflict Seen Fueling Defense Tech

The conflict between Israel and Hamas is fueling speculation that Elbit Systems Ltd., the nation’s biggest listed developer of military technology, will see more government orders for its defense products.

U.S.-traded shares of the Haifa, Israel-based company have advanced 6.1 percent to $63.01 since fighting intensified on July 8, compared with a 2.3 percent gain on the Bloomberg Israel-US Index. The rally has pushed the stock close to the highest level since 2010 while its valuation on a price-to-earnings basis is near the most expensive in five years.

Elbit, which received about a quarter of revenue from its home country last year, may benefit as the Israel Defense Forces reevaluate security needs after the current conflict, according to Bank Leumi Le-Israel. While Elbit (ESLT) doesn’t focus on munitions that could deflect rockets like the Iron Dome anti-missile defense system, there may be increased demand for products that protect Israeli soldiers in combat, such as its Guardium unmanned security vehicles, Leumi’s Ella Fried said.

“It may boost demand for all their high-tech land and intelligence products, not in this campaign but further on,” Fried, who rates the shares the equivalent of hold as an analyst at the Tel Aviv-based bank, said by phone on July 24. “We may see this in the further backlog, more life sparing devices.”

Expensive Stock

Israel intensified air strikes on Gaza on July 8 after weeks of rocket fire from Hamas fighters, and later sent troops into the territory in an operation it says aims to destroy a network of infiltration tunnels militants dug under the Gaza-Israel border. Two Israeli civilians and 43 soldiers have been killed, while more than 1,100 Palestinians have died in three weeks of fighting.

Dalia Rosen, Elbit’s head of corporate communications, declined to comment via e-mail on the trading and the company’s order flow.

Elbit’s U.S. shares have rallied 54 percent since the end of 2011, surpassing gains of 47 percent on the Bloomberg San Diego Defense and Aerospace Index and the Bloomberg Israel-US Index. The shares trade at 13.7 times estimated earnings, near the highest since 2009. They have narrowed their valuation gap relative to the defense index, which has an average multiple of about 15, to the lowest since 2013, according to data compiled by Bloomberg.

Israel-traded shares were unchanged at 215.50 shekels at the close in Tel Aviv.

No Benefit

While Elbit’s sales are forecast to grow 1.7 percent this year to $2.98 billion, net income will fall 7.7 percent, according to the average of three analyst estimates compiled by Bloomberg. Profits are being squeezed by the shekel, which has advanced 1.4 percent this year after a 7.5 percent surge in 2013, increasing the cost of the company’s research and development in Israel, according to Fried.

Not all investors believe the company will benefit from the most recent military escalation in the Gaza Strip.

“They provide some of the self defense systems and infrastructure rather than front line supplies,” William Scholes, who helps oversee $180 billion in assets at Aberdeen Asset Management Plc, including the Aberdeen Israel Fund, said by phone from London July 24. “Many of their revenues are basically global so I don’t think there’s going to be a marked increase in volumes as a result of this conflict.”

Government-owned Rafael Advanced Defense Systems Ltd. developed the Iron Dome anti-missile defense system.

Just one of six analysts has a buy rating on the stock, with the rest rating it hold. The price is forecast to drop 3.2 percent to about $61 in the next 12 months, according to Bloomberg compiled data.

Elbit has been expanding sales in Southeast Asia and Latin America after military budget cuts in the U.S. and Europe hurt business and increased competition from larger players like Lockheed Martin Corp., said Leumi’s Fried.

“Elbit is achieving moderate, low-digit growth, which is a great achievement in this industry now,” she said. “As international revenue grows, dependence on the IDF is going down, but it’s still very important. It’s a combat army, a fighting army, and they have a lot of input from IDF.”

To contact the reporters on this story: Gabrielle Coppola in New York at gcoppola@bloomberg.net; Edith Waringa Kamau in New York at ekamau2@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Marie-France Han, James Doran

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.