Elbit Systems Ltd. (NASDAQ:ESLT) is a defense aerospace company operating out of Israel. The company provides services to both the commercial aerospace industry and the defense aerospace industry. In the defense sector, Elbit Systems offers its services in land and naval defense systems, communications, intelligence and surveillance, advanced electro-optics and unmanned aircraft systems. In the commercial sector, Elbit provides communications, sensitive electronic systems, as well as radio and navigation systems. The company also focuses its efforts in the defense sector to modernize and fortify existing defense systems. Commercially, the company also offers training and simulation systems. Elbit Systems Ltd. Trades on both the US stock market and the Tel Aviv markets.
This article will show that Elbit Systems Ltd. is a stable and profitable stock that is poised to continue generating and growing revenue and profits. The company is helped by the fact that it sits in two lucrative markets: the commercial aerospace market and the aerospace defense market. This opens up a multitude of growth avenues while limiting the risk of market collapse. Their expansion into several different countries and continents also adds validity to the growth potential. In effect, this greatly expands their market pipeline, enabling both growth through sales and revenue from an expanded customer base and through acquisition. For these reasons, I consider Elbit Systems Ltd. as a company with significant upside potential over the coming quarters.
Dual market dominance
Elbit Systems Ltd. has positioned itself well in the aerospace industry by becoming a top name in two different markets. The company manufactures sensitive electronics such as radios and communications for the commercial aerospace market while also offering training and simulation software to help train employees. In the aerospace and defense markets, they market high-end surveillance equipment, reconnaissance systems and electronic warfare suites. Additionally, Elbit Systems provides upgrades to existing military platforms.
From 2015 to 2020, the global aerospace market experienced a slight slump. It had regressed to a CAGR of minus 0.3% over a six-year period. However, from 2015 to 2020, this number is expected to improve significantly, with projections indicating a CAGR of 7.7% through 2025. After 2025, the CAGR is expected to return to a higher average of 5.9% through 2030. This would increase the market capitalization from $298 billion in 2020 to $573.6 billion in 2030, an increase of almost 100%. This puts the future revenue potential of Elbit’s commercial aerospace holdings into perspective. According to these projections, the future looks very bright.
The US defense industry is perhaps one of the most reliable markets. At a time of escalating war and international tensions, the race to develop the latest land and naval defense technologies, as well as intelligence and reconnaissance technologies, is reaching an unprecedented level. The US defense market alone is worth $416.6 billion with an expected CAGR of 2.37%. The global defense industry is even more promising, and is expected to grow at a CAGR of 5.8% through 2026. This particularly benefits Elbit, as its services extend to many locations around the world, from so they are not beholden to just one defense market.
Contract with the Department of National Defense of Canada
In March 2022, the Canadian Department of National Defense entered into a contractual agreement with Elbit Systems Ltd. The agreement is for Elbit Systems to provide a TORCH-X based solution as part of the country’s ASCCM project. The solution will be delivered to Canadian military headquarters and will provide both land and joint command to support air missions and joint task force operations.
Elbit Systems plans to deliver on that promise by delivering a joint airborne version of its patented TORCH-X combat management system. In order to provide situational awareness, a recognizable aerial image of the local area is displayed. This will enable the coordination of air assets in complex land and joint combat spaces. Canada will manage this system using Elbit’s E-CIX open architecture framework. This will enable existing Canadian Armed Forces tactical data links and applications while opening the door for the future integration of more advanced technologies.
Revenue was a strong point for Elbit Systems Ltd. over the past four years. In each consecutive year, they have increased their income. As of 2018, the company’s revenue was $3.3 billion. In 2019, that figure rose to $3.6 billion. 2020 saw a huge increase in revenue growth, closing the year at an impressive $4.5 billion. In 2021, the company saw another slight increase in revenue, ending the year at $4.66 billion. Profits have not grown as steadily as revenues would suggest. This is primarily due to the rising cost of revenue which has gone from $2.3 billion in 2018 to just under $3.5 billion in 2021. That being said, the company has still benefited from four years of stable profits, with their four-year average profit amounting to just over $1 billion a year.
The company’s long-term debt has nearly doubled since 2018. In 2018, long-term debt was $244 million. In 2019, this number saw a significant increase, totaling almost 524 million. That number fell slightly in 2020 as the company repaid much of its obligations, reducing total debt to $440 million. In 2021, the company began repaying its obligations, reducing debt to a total of $408 million to end the year. As debt has been reduced, the company’s assets have exploded massively through both expansion and acquisition. In 2018, this company held $4.7 billion in assets. In 2019, total assets reached $6.4 billion. 2020 saw another jump in this metric, with assets totaling $7.3 billion. 2021 saw the end of the year with a whopping $8 billion in company assets, nearly doubling their 2018 figure. In the case of Elbit Systems Ltd, it’s clear that’s their business practice since at least 2018. Every year the company shows a negative in the CAPEX column. Their latest release of $132 million in 2021 shows that the company continues to demand more despite its record year of revenue in 2021. This is always a good sign for a company moving forward.
From a financial point of view, Elbit Systems Ltd. is in a very stable position. The company posted record revenues in 2021. Debt levels have dropped significantly over the past two years, demonstrating responsible financial management. The company continues to grow, increasing revenue without incurring excess debt, which is a very positive sign. If there is any area of concern it is in the profit margin, where the company is earning barely a third of its revenue in profit as the cost of revenue continues to rise. However, given that the company has averaged $1 billion in profit in each of the past four years, I would rate this concern as minimal. I would say that Elbit is a very lucrative and successful company that has set itself up to move forward.
Elbit Systems Ltd. is a strong aerospace and defense company. Covid-19 has severely affected the commercial aerospace market, and its recovery has taken some time, but all signs indicate that it will eventually arrive. Elbit was able to withstand this impacted market in part because they also serve the global defense market. Their partnerships with other countries to provide land, sea and air defense systems extend around the world to several different countries beyond their most recent contract with Canada. The company has expanded its assets, reduced its debts, increased its revenues and achieved a consistent profit over the past four years. From a financial metrics perspective, you can’t ask for much more than that. I believe that Elbit Systems Ltd. represents a solid stock in a stable market, and I see nothing but huge potential for success in the future.