2023-06-20 05:02:17 ET
Summary
- Elbit Systems' Q1 FY23 revenues increased by 3% compared to Q1 FY22, driven by growth in its C4I and Cyber, ISTAR and EW, and Land segments.
- The company's stock is currently overvalued, with a forward P/E ratio of 29.02x compared to the sector ratio of 17.26x.
- Despite good fundamentals and financial performance, the high valuation leads to a hold rating on ESLT.
Elbit Systems ( ESLT ) develops a portfolio of airborne and naval systems for defense and homeland security. They also provide unmanned aircraft systems, night vision, land vehicle systems, cyber systems, laser systems, cyber intelligence, and protection systems. ESLT recently announced its Q1 FY23 results. In this report, I will analyze its Q1 FY23 results. I think it is currently overvalued. Hence I assign a hold rating on ESLT.
Financial Analysis
ESLT recently posted its Q1 FY23 results . The revenues for Q1 FY23 were $1.3 billion, a rise of 3% compared to Q1 FY22. I believe growth in its C4I and Cyber, ISTAR and EW, and Land segments were the main reason behind its revenue growth. The revenue from its C4I and Cyber segment grew by 19% in Q1 FY23 compared to Q1 FY22. I believe the increase in command-and-control systems sales was the main reason for revenue growth in the C4I and Cyber segments. The revenues from its ISTAR and EW segment rose by 17% in Q1 FY23 compared to Q1 FY22. I believe growth in electronic warfare system sales was the major reason behind the revenue growth in the ISTAR and EW segments. Regarding the Land segment, its revenue grew by 8% in Q1 FY23 compared to Q1 FY22. I believe the rise in armored vehicle upgrade sales was the main reason behind the revenue growth in the Land segment.
The operating income margin for Q1 FY23 was 6.7% which was 4.3% in Q1 FY22. Their net income also increased in Q1 FY23. The net income for Q1 FY23 was $62.1 million, a rise of 17.4% compared to Q1 FY22. In my opinion, aside from the improvement in margins, there wasn't anything significant or notable in Q1 FY23. The revenue growth was moderate, and they have been facing supply chain disruptions and labor challenges for the past three years, which affected its growth to some extent. However, with time these difficulties have been improved, and I think in the coming quarters its sales growth might increase, and the growth rate in the upcoming quarters may be higher than it is now.
Technical Analysis
ESLT is trading at the $206 level. The stock is above its 200 ema, which indicates that it is in an uptrend. After consolidating in a small range for almost five months, it broke out of the range in the month of April, and it is currently headed toward its all-time high. In my opinion, the best time to invest in the stock was when it broke out of the range in the month of April, but the ship has already sailed, and there is no point buying the stock at this level because it is risky to buy the stock now because it has started to trade in a range of $193-$210 and if it breaks $193 level then the stock might fall up to the $175. So I believe one should only consider buying the stock once it breaks its all-time high of $244. As I believe once it breaks its all-time high, then I think we might see new upward momentum in the stock.
Should One Invest In ESLT?
Talking about the positives of the company. In the last three years, they had to face several macroeconomic headwinds like supply chain disruptions, challenges due to Covid-19, and challenges in the labor market, but despite facing several challenges, they managed to grow their revenues in the past three years, which is an optimistic sign and with time supply chain and labor challenges are abating which I believe will help them in the coming times. In addition, if we look at their backlog, by the end of 31st March 2023, they had a backlog of $15.8 billion, a rise of 13.2% compared to Q1 FY22, and the management expects that 54% of the total backlog will be completed during '23 and '24 and due to its leading technology solutions they are continuously awarded new orders which positions them for the future, like the contract by the Airbus Helicopters, Netherlands Ministry of Defense, and UK Ministry of Defense. So the record backlog and its ability to win orders is an optimistic sign. However, despite its good fundamentals and financial performance, I have a few concerns due to which I am not assigning a buy rating on ESLT.
Talking about its valuation. ESLT has a P/E [FWD] ratio of 29.02x compared to the sector ratio of 17.26x and has an EV / Sales [FWD] ratio of 1.81x compared to the sector ratio of 1.69x. After looking at both ratios, I believe ESLT is overvalued, and its current growth rate doesn't justify its high valuation. If we take its P/E [FWD] ratio and divide it by its share price, we get a forward EPS of $7.1. If we take its five-year average P/E of 23x, which is still above the sector's average, we get a share price of $163. So, I think ESLT is way overvalued and is currently trading at higher premiums than it deserves. Hence looking at the high valuation, I assign a hold rating on ESLT.
Risk
In recent years, there has been an increasing trend in many nations to promote collaboration with domestic companies, including through various incentives and financial support. Examples include a preference for using local vendors and requirements for collaboration with local organizations, including sharing technologies and production lines. Following such a trend frequently entails investing in local facilities and subsidiaries and dealing with complicated operational challenges. It must also fulfill "Industrial Participation" or offset responsibilities for several of its overseas activities, which adds to its expenditures and might affect its margins and net income.
Bottom Line
Despite performing well, its current growth rate is modest, and its current valuation is way higher than it should be. Hence I assign a hold rating on ESLT.
For further details see:
Elbit Systems: Currently Overvalued Despite Performing Well