Elbit Systems Ltd.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Elbit Systems Ltd. is an Israel-based international defense electronics company that provides a wide range of systems and solutions for aerospace, land, and naval applications, as well as cyber security and command and control systems.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Elbit Systems operates in the defense and homeland security industries. The company’s primary mission is to provide technological solutions that are designed to enhance military and security capabilities. Elbit has a broad portfolio, which includes many different systems that can be grouped as follows:

  • Aerospace Systems: This includes military aircraft and helicopter systems, head up displays, display systems, and mission computers, avionics, and communication systems.
  • C4I and Cyber Systems: This includes communication systems and equipment, cybersecurity and intelligence solutions, automated command, control, communications, computers and intelligence (C4I) systems, and cyber-defense systems.
  • Land Systems: This includes artillery, armored vehicle systems, guided munitions, target acquisition systems, and advanced soldier and soldier equipment.
  • Naval Systems: This includes naval combat systems, surveillance systems, and underwater systems.
  • Training and Simulation: This includes a range of training and simulation technologies, including flight simulators and virtual environments.
  • Commercial aviation and aerospace aftermarket- including aircraft maintenance, repair and overhaul services.

The company primarily serves government and defense agencies, offering both products and services. Elbit also supplies systems to various commercial customers in industries such as aerospace, homeland security, and medical services.

Revenue Distribution Elbit’s revenues are categorized by geographic region, with North America being the largest market, followed by Asia Pacific, Israel, Europe, and Latin America.

  • Geographic Distribution: North America is the largest source of revenue, followed by Europe, Israel, Asia Pacific, Latin America, and other regions.
    • North America: ~$1.5 billion USD
    • Europe: ~$1.3 billion USD
    • Israel: ~$1.0 billion USD
    • Asia Pacific: ~$0.7 billion USD
    • Latin America: ~$0.4 billion USD

Industry Trends

  • The global defense industry is influenced by geopolitical tensions and security threats, driving demand for advanced defense technologies.
  • The increasing reliance on technology in warfare and cybersecurity has fueled innovation in the defense sector.
  • Governments are increasingly prioritizing domestic manufacturing and supply chains and are willing to subsidize them.
  • There is a growing emphasis on multi-domain warfare and integration of different technologies.

Margins and Competitiveness

  • Elbit typically has a gross profit margin of around 28-30%. The operating margin stands at around 8% and the net margin tends to be around 5-7%.
  • The company is a global leader in several of its niches, including the provision of electronic warfare and C4I systems and the manufacturing of high-end electronics for military aircraft and missiles.
  • The competitive landscape of this company is characterized by a few big players across the globe like Lockheed Martin, General Dynamics, Raytheon, etc. but many smaller players, as well.
  • Elbit differentiates itself from competitors by having a variety of products across many industries, and by being a technological leader in those industries.
  • The company is in a period of transformation right now, with an emphasis on growing its core businesses and cutting its overall costs.

Recent Concerns / Controversies

  • Elbit’s performance was impacted by supply chain disruptions, higher raw material costs, and rising labor expenses.
  • The company experienced some fluctuations in cash flow due to changes in contract payment schedules.
  • There was a discussion of increasing competition in certain markets, requiring additional efforts in sales and marketing.
  • Due to some specific circumstances, there was the need to adjust the forecast and guidance of revenue going forward.
  • While revenue increased significantly, margins have been under pressure recently.
  • The company has been involved in legal proceedings related to certain contracts and investments, impacting its overall financial reporting.
  • Cyber Security continues to be an important driver of value, but also an area that requires constant reinvestment.
  • Some investors were concerned about the impact of geopolitical uncertainties and disruptions on the company’s financial performance.

Financial Analysis

  • Revenues: Elbit generated a total revenue of approximately $5.3 billion in 2022, representing a ~7% increase from 2021. The revenue growth was especially strong in Europe, and Asia Pacific. The company has benefited from new contracts and the increase in existing contracts.
  • Profitability: However, there is a decrease in the net margin which has been primarily caused by a rise in operating expenses and interest expense.
  • Cash Flow: Cash from operations is very high. However, free cash flow is impacted by changes in working capital.
  • Capital Structure: The company has a moderate amount of debt, and appears to be conservatively financed. The equity base is also quite substantial, and it is primarily driven by retained earnings.
  • Valuation: Current price to earnings ratios are quite high compared to peers which might indicate that the company is overvalued.

Moat Rating: 3/5 Elbit Systems has a narrow moat based on several factors. These include, but are not limited to:

  • Switching Costs: The company benefits from the high switching costs, mainly for customers from its government segment. Once Elbit’s systems are integrated with the defense agencies’ existing infrastructure, they’re not easily switched out for a competitor’s offering. The high complexity of the programs and the need for constant collaboration further increase these switching costs.
  • Intangible Assets: Some level of advantage comes from its long operating history and strong brand recognition in several niches. The high reputation that comes from being an established, reputable brand with strong track records makes it difficult for newcomers to compete, especially in mission-critical applications.
  • Proprietary technology and R&D: Elbit is a leader in certain segments and operates in the technology industry, where the costs of entry are high due to technological complexity. For example, the company invests a huge part of its earnings into R&D to make sure it stays ahead of its competitors.
  • While these factors enable Elbit to maintain a strong position in certain market segments, they are not impossible to replicate. Moreover, Elbit has a variety of different products, so the competitive advantages may vary across the different segments.

Risks to the Moat and Business Resilience

  • Dependence on Government Spending: As a defense contractor, Elbit is heavily reliant on government defense budgets. If government spending on defense decreases, the company’s prospects could be impacted.
  • Geopolitical Risks: The company operates in politically volatile regions and is subject to political instability and potential disruptions. This is especially visible in Israel.
  • Technological Change: Given the fast-moving pace of the technological sector, the company will be challenged to keep on innovating at a high rate to avoid technological obsolescence by its competitors. Also, newer technological advancements that it was slow to adopt might also diminish existing moats.
  • Competition: Despite its competitive advantages, Elbit also faces tough competition in most of the market it operates. Competitors may be better priced, offer superior value, or become more innovative in future periods.
  • Supply Chain Disruptions: Disruptions in the supply chain, especially for specialized components, could cause delays in production and increase costs. These may limit the ability of Elbit to meet contract obligations on time.
  • Cyber security: The continued risk of cyber security attacks means that this area requires additional investment, which may increase expenses.

Understandability Rating: 3/5 Elbit’s business is fairly complex due to its presence in different regions and industries, as well as the large scope of the solutions it offers. The valuation is also quite complicated as the company is affected by global macroeconomic conditions, political landscape, and government defense spending. Overall, while the company’s operations are not overly technical, financial reporting, and the analysis required to valuate the company are all somewhat complex for a lay investor.

Balance Sheet Health Rating: 4/5 Elbit appears to have a healthy balance sheet as of 2022 and 2021. The level of debt is moderate, but its overall health has also been improving over the past few years. While the company isn’t debt-free, it is taking the steps to pay off debts which is also a positive trend. It also has a solid amount of cash. Overall, based on this, it seems like the balance sheet of Elbit Systems is fairly healthy.