Elbit Systems: Ongoing Privatization Should Lead It to Victory

| About: Elbit Systems (ESLT)

I was pleased to finally see the right description given to the business of Elbit Systems Ltd. (Nasdaq: ESLT), one of my top picks for the next decade. The right description is International Defense Electronics Company. I would add the word sophisticated after International, but even without it, the description is appropriate. It should be understood that defense electronics will be the big story of the next decade or until they beat terrorism - whichever comes first.

It looks clear to me that as Israel will be staying in the U.S. camp (the other side simply doesn't want us, even though it would be happy to use the products of the Haifa company), Elbit Systems will grow at the expense of the current government-controlled defense industries. It will take time and a lot of convincing and battles with workers' committees and interested parties, but eventually Elbit Systems will gobble up fast-growing government companies. So between the ongoing privatization and the company's own organic growth, I feel safe for the next 20 years.

Twenty years, however, is a long time, so let's take another look at how things are at present. I'll start with the company's orders backlog (which, I was told, is real and is anchored by contracts), which stood at $3.79 billion at the end of 2006, compared with $3.35 billion at the end of 2005. 70% of the orders backlog is scheduled for delivery through 2007-2008, and 68% of it is to customers outside Israel. Elbit Systems' revenue rose by more than 42% to $1.523 billion in 2006, from $1.07 billion in 2005. Net profit soared 122% to $72 million, while diluted earnings per share climbed 120.5% to $1.72 from $0.78. The company accomplished all this despite the burden on its financial statements caused by the acquisition of Elisra Group.

Although I'm very keen on Elbit Systems, especially with regard to its long-term prospects, it does have a few weak points. Firstly, the balance sheet is weak in terms of its assets versus its liabilities. A company like Elbit Systems, which could find itself bidding for mega deals, ought to have a stronger balance sheet. There has, however, been a great improvement, compared with the days when I first started following the company many years ago, and I'll be quite happy if this continues to be the only blip on the horizon.

Then there is also the company's profit margins which I feel are a tad low. The net profit on sales is too low (certainly when compared with that of the company's U.S. rivals). Having noted all this, I have no doubt that company CEO and president Joseph Ackerman has a good grasp of the issues involved here and that the company will continue its streamlining, strengthening its financial base even further.

ESLT 1-yr chart

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.