Elbit Bucks Declines as Israel Defense Exporters Seek Help

  • International acquisitions bolster Elbit amid global slump
  • Anti-hacker technology, military drones seen boosting growth

Israel’s Elbit Systems Ltd. has managed to thrive in a shrinking global arms market through international acquisitions and branching out into cyber security.

Haifa-based Elbit’s sales rose 5.8 percent in the last quarter, the third-biggest revenue increase among 14 defense companies with a market capitalization exceeding $3 billion, beating U.S. giants such as Raytheon Co. and Lockheed Martin Corp., according to data compiled by Bloomberg. Shares have risen 39 percent since the end of last year.

While other defense contractors are suffering from the winding down of U.S. wars, Elbit’s practice of making acquisitions in international markets has enabled it to prosper, according to Liran Lublin, an analyst at Israel Brokerage & Investments Ltd. “They prefer to buy a small domestic company that can sell Israeli products with a local label,” said Lublin, who has a buy rating on the stock.

Elbit’s Chief Executive Officer Bezhalel Machlis pointed to the company’s $158 million purchase of Nice Systems Ltd.’s cyber solutions and intelligence division, predicting in a May interview it would be a “major growth engine.”

Shares traded 1.3 percent higher at 11:32 a.m. in Tel Aviv on Wednesday after the company announced a $26.5 million order to supply infrared systems to an unidentified country in the Asia-Pacific region. On Tuesday, shares rose 2.3 percent after the stock was upgraded to buy from neutral at Excellence Nessuah Brokerage Ltd., which cited the “resounding success” of Elbit’s Asia strategy and a “geopolitical environment” that may stimulate military spending.

Although Elbit’s own situation has improved, the outlook for Israel’s other defense contractors is bleaker, and the company has joined them in raising the alarm. The nation’s defense exports tumbled from $7.5 billion in 2012 to $5.5 billion last year and could drop as low as $4 billion this year, they said in an Oct. 11 letter to Prime Minister Benjamin Netanyahu and Defense Minister Moshe Ya’alon seeking their help. Total Israeli exports last year were $99 billion.

The letter, signed by chief executives of Elbit and state-owned Israel Military Industries Ltd., Israel Aerospace Industries Ltd. and Rafael Arms Advanced Defense Systems Ltd., says exports are in a “significant crisis” and calls on Israel to increase the Defense Ministry’s budget. Bloomberg obtained a copy of the Oct. 11 letter, first reported by Defense News, an international weekly. 

Israel is the world’s No. 7 weapons exporter, ranked by the Stockholm International Peace Research Institute behind the U.S., Russia, China, France, Germany and the U.K.

Acquisition Risk?

Among risks that could hurt Elbit is the possible acquisition of Israel’s cash-bleeding military manufacturer IMI, said Gilad Alper, a senior analyst at Excellence Nessuah in a note to investors. “We hope management will know better than to get involved with this entity,” he said.

Elbit plans to build on its trend-defying revenue increases with anti-hacker technology and military drones, Lublin said. Buying the Nice Systems unit anticipated growing demand for cyber security products as companies such as JPMorgan Chase & Co., Ebay Inc. and Target Corp. have suffered massive data breaches.

The company announced two contracts in August signed by its new Cyberbit unit with unidentified law enforcement agencies in Europe and Asia, Lublin noted. Last month it sewed up a $200 million sale of its Hermes drones to the Federal Department of Defense, Civil Protection and Sport in Switzerland.

“Armies tend to spend more on modern equipment rather than on personnel, meaning that Elbit could see growth close to 8 percent to 10 percent a year,” he said.

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