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Israel-Based Elbit Winning Defense Contracts

- By Holmes Osborne, CFA

Elbit (ESLT) is an Israel-based defense manufacturer that is a leading in high tech. The stock is a recent purchase of the Wintergreen Fund (Trades, Portfolio). The company has been winning contracts from governments all over the world.

There are 42.75 million shares, the stock trades for $118.12, and the market cap is $5 billion. The dividend is $1.60, and the dividend yield is 1.35%. Morningstar lists trailing 12-month earnings per share as $5.44 so the stock would trade at a price-earnings (P/E) ratio of 21.7. Pretty reasonably priced for a growth company.

2011 revenues were $2.82 billion and grew to $3.19 for the trailing 12 months. Good growth. Earnings per share grew from $2.82 to $3.19 over that time frame. Return on equity is usually midteens and operating margins are high single digits.

According to Elbit's Annual Report, 20% of sales come from Israel, 27% North America, 16% Europe, 10% Latin America, 26% Asia and 1% from other countries; 39% of sales are airborne, 18% land systems, 32% from C4ISR, 7.5% electro-optic, and a small amount in other. Elbit manufacturers helmets used by helicopter pilots, suits worn by pilots in fighter jets, drones, laser and thermal imaging systems, gun turrets, systems for radar, cyber security, and commercial aviation systems.

Straight from the Annual Report: "Our main competitors include divisions and subsidiaries of Boeing, Lockheed Martin, Northrop Grumman, Raytheon, General Dynamics, BAE Systems, Rockwell Collins, L-3 Communications, Thales, Airbus, Finmeccanica, Saab, Harris, Textron, FLIR Systems, Orbital ATK, AeroVironment, Rhode and Schwartz, Rheinmetall, Kongsberg, Safran, Aselsan, Bharat Electronics, Cubic and Verint."

I got the idea from reading Wintergreen Fund's Annual Report. The report notes that Elbit is getting defense orders from Latin America and Asia. It has grown sales at 2.7% per year over the last five years. Wintergreen believes it's just a matter of time before the company begins picking up new contracts; 45.82% of shares are owned by Federmann Enterprises and 8.98% owned by Heris Aktiengellschaft. Both entities are controlled by the Federmann family.

In the most recent quarter, sales were $804.5 million, up from $749.6 million in the same quarter in the prior year. The balance sheet is strong with $189 million in cash and $1.27 million in receivables. The liability side shows $172 million in short term debt, $372 million in payables and $317 in debt.

The thesis with this investment is that the military has gone high tech. Even mortar shells are guided. Unbelievable. Inside of a tank, Elbit manufacturers the systems to manage fires, radar, night vision and even unmanned turrets. Imagine sitting atop a tank and having to fire a machine gun. You'd be completely open to a sniper's fire. Elbit's drone, the Hermes 900, can carry a payload of 350 kilograms. Imagine that. The drone weighs 1,180 kilograms and can fly up to 36 hours.

The company has many divisions that have potential. One such division is border protection. Elbit manufactures monitoring devices that are attached to border fences. Pipeline protection can be used to protect oil, natural gas, and other pipelines. This article discusses how Israel should do under President Donald Trump's new spending goals.

The company recently won a $103 million contract to supply guided mortars to the U.S. military. Elbit also won a $117 million contract to update an "undisclosed" Asian countries fleet of Mi-17 helicopters. Moving right along, the company won another $100 million contract to provide Brazil with an unmanned turret for its armored vehicles. India is purchasing a missile defense system of which Elbit is sure to be part.

You can see why Wintergreen bought shares. It's a growth industry. A country has to have super high tech defense systems to stay up with its competitors. I'd like to know more about Elbit. They certainly are winning contracts. Will the stock reflect that?

Disclosure: We do not own shares.

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