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Is Arotech Turning A Corner?

|Includes: Arotech Corporation (ARTX)

Arotech Corporation (NASDAQ: ARTX) is a leading defense and security products and services company. The company offers quality defense and security products for the military, law enforcement and security markets. This includes lithium batteries and chargers, advanced zinc-air, and multimedia interactive simulators/trainers.

It operates in three major business divisions: Interactive simulation for military, advanced armoring for military and nonmilitary air and ground vehicles, batteries and charging systems for the military and law enforcement and commercial markets.

On May 14, Shares of Arotech rallied 19 percent making the stock one of the biggest movers of the day. The company has since received a number of upgrades and positive initiations by leading analysts as the market continues to establish bullish sentiments about its immediate future.

In the most recent quarter, the company's earnings grew by 67 percent to $0.05 per share compared to $0.03 per share reported in Q1, 2013. This is a massive improvement on the company's cost management department considering that its revenues soared by just 1.5 percent.

Nonetheless, a continuous improvement on the company's margins could result in incremental growth in earnings because despite the difference in earnings growth and revenue growth, the company's overall margins remain low.

Gross margin stands at about 33 percent, while the operating and net profit margins stand at 4.5 percent and 3.11 percent respectively.

Based on the recent results, it appears as though the company could be turning a corner. Analysts are growing in optimism which is good for the overall market sentiment, while the results are also improving which paints a better picture on the company's fundamentals.

Despite Arotech's low profit margin, the company has managed to grow its earnings when compared to the same period a year ago. In terms of revenue outlook, Arotech's training and simulation division has received $3.5 million in new orders. The company has also received new orders from military customers amounting to $5.2 million. The company expects these orders to boost its revenues for the next three quarters.

Arotech's battery division is also witnessing a very promising year so far. The company is also eyeing some important R&D developments such as its progress with the highly accretive acquisition of UEC, the iron flow battery, as well as continued order momentum.

The key factors that have influenced Arotech's rating are mixed. Some factors are indicating strength, some indicating weaknesses, with slight evidence to validate the anticipation of either a positive or a negative performance for this stock relative to most other stocks.