Analysts Cool on Elbit Even as Tensions Lift Defense StocksBy
Investor sees solid long-term holding, likes its balance sheet
Analysts see ‘uninspiring’ growth, don’t rate Elbit a ‘buy’
Shares of Elbit Systems Ltd., the largest publicly traded defense company in Israel, hit an all-time high this week, benefiting from heightened global tensions following new U.S. sanctions on Iran. Yet none of the three analysts that cover the company rate it a buy.
“Growth is uninspiring,” said Gilad Alper, head of foreign equity research at Excellence Nessuah Brokerage Ltd. in Petach Tikva, Israel, who rates the company at market perform. “To really justify the share performance the company has to generate real organic growth.”
Elbit, which sells a broad range of air, land, naval and cyber security products, saw third-quarter sales grow two percent from the previous year, while its order backlog barely changed from the second quarter.
Elbit shares have soared 18 percent in the past three months, far more than its global peers, to a record close of $114.26 on Tuesday in New York. Still, the company’s five-year sales growth of 3 percent lags its peer average of 5 percent, and its three-year Ebidta margin is 12.6 percent, compared with its peers’ 13.8 percent, according to data compiled by Bloomberg.
The company’s Israeli shares were down 0.3 percent to 424.20 shekels as of 2:48 p.m. Wednesday in Tel Aviv, their first decline in four days.
Ilanit Sherf, head of research at Psagot Securities Ltd., who rates Elbit an underperform, attributed most of the share gains to statements by new U.S. President Donald Trump and increased defense budgets in Europe. A lot of the company’s growth has already been priced in, she said.
“The market is looking for shares we call stable investments that will give them dividends,” she said. “It is an excellent company managed very well, but something dramatic has to happen for Elbit to justify its price -- either more growth, better margins or an excellent acquisition.”
Elbit isn’t the only defense company to see its shares soar: Thales SA stock hit a record high on Dec. 28, but its aggregate rise over the past three months is only 5 percent. Northrop Grumman Corp. shares added 1.4 percent in the period and hit a high on Nov. 29. Generally, the global aerospace and defense sector is likely to experience stronger growth in 2017 after multiple years of subdued expansion, Deloitte said in a report last month.
Growth will be driven by Trump’s focus on strengthening the U.S. military, as well as rising tensions that could spark demand for defense products in the Middle East, Eastern Europe, North Korea and the East and South China Seas, Deloitte said.
David Winters, chief executive officer of Wintergreen Advisers LLC, which bought Elbit shares in the third quarter of last year, sees the company as a long-term investment with a solid balance sheet.
“They have a good, diversified line of products and, as you well know, they are well suited for the world we all live in now,” Winters said by phone from New Jersey.
Wintergreen, which also has a small holding in General Dynamics Corp., bought 0.3 percent of Elbit’s outstanding shares in part due to its product lines.
Elbit “isn’t as big as some of the giants and can be more nimble,” Winters said. “It’s harder for the bigger companies to grow.”
With a market capitalization of almost $5 billion, Elbit is larger than the average middle-sized defense company. The company is always looking for acquisitions to expand its business, according to Dalia Rosen, Elbit’s vice president of marketing.
Elbit acquired Nice Systems Inc.’s cyber intelligence unit in May 2015 and merged it into its Cyberbit Ltd. division, increasing the company focus on virtual threats amid strikes on electric grids and election campaigns. Cyberbit Chief Executive Officer Adi Dar said sales grew tenfold last year as it added new products and 150 new employees, and started selling in the U.S.
“Buying companies and generating growth the following year is easy,” Excellence’s Alper said. “They need to show how much profit they can generate over the next few years, and that remains to be seen.”