Summary
- Elbit is highly leveraged to multiple major catalysts.
- The company should benefit from increased spending on cybersecurity and drones.
- It should also be boosted by higher defense spending in the U.S. and Israel.
Israeli defense contractor Elbit Systems (NASDAQ:ESLT) has strong multiple catalysts that are likely to push the stock higher going forward.
Elbit is highly leveraged to two rapidly expanding trends: cybersecurity and drones. Additionally, the company is well-positioned to benefit from rising defense spending in both Israel and the U.S.
The company markets a variety of cybersecurity systems, including its Elbit CyberShield NCD, which supports all phases of the cyber-security process, including collection, detection, enrichment and analysis, management, response and prevention, according to the company. The company’s Elbit CyberShield NCDS system supports all phases of the cybersecurity process, including collection, detection, enrichment and analysis, management, response and prevention.
Moreover, Elbit recently significantly expanded its presence in the cybersecurity sector by acquiring Nice Systems’ (NASDAQ:NICE) cybersecurity unit for about $158 million.
According to Bloomberg, demand for cybersecurity products is growing due to multiple highly damaging hacking attacks on major companies, including Sony (NYSE:SNE) and JPMorgan (NYSE:JPM), in recent months.
Probably more to the point for Elbit, since the U.S. government is one of its major customers, is that President Obama proposed increasing the federal government’s spending on cybersecurity by $1 billion to $14 billion in his fiscal 2015 budget. Under the blueprint, the Pentagon would receive $5.5 billion for cybersecuity. Meanwhile, worldwide spending on information security will reach $71.1 billion in 2014, an increase of 7.9% over 2013, according to research firm Gartner. Total information security spending will grow another 8.2 % this year, reaching $76.9 billion, the firm forecast.
In September 2014, Elbit obtained a foothold in the Asian cybersecurity market as it made a deal to provide its Cyber Security Simulator to Singapore’s ST Electronics. The deal with ST could result in more cybersecurity transactions for Elbit in the region, since other companies in the area will probably hear if ST is satisfied with Ellbit and its product.
Drones are another high growth market in which Elbit is heavily involved. In recent years, Elbit has sold drones to multiple countries, including Switzerland,Brazil and, of course, Israel.
In 2013, Israel became the world’s largest exporter of drones, although it was a distant second to the U.S. in terms of production, according to The Financial Times. Since Elbit and Israel Aerospace Industries are Israel’s two major exporters of unmanned aircraft, Elbit must be selling many drones. Research firm Frost & Sullivan estimated that Israel exported $4.6 billion of drones and related products and services between 2005 and 2012, The Financial Times noted.
According to research firm Teal Group, the revenue from drones will nearly double over the next decade to $11.5 billion in 2024 from $6.4 billion in 2014.Elbit says it recognizes that drones will be used for many non-military purposes going forward, and at least one country has already used Elbit’s drones for such a purpose: Brazil has utilized Elbit’s drones to provide security at soccer games.
Finally, Elbit should benefit from increased defense spending in both Israel and the U.S. Israel late last year increased its defense budget by over 10%, partly because it is preparing for a confrontation with Iran, according to Reuters.
Meanwhile, Senate Republicans are looking to increase the country’s defense spending by $38 billion, through increased war funding allocations., Defense News reported. The president has vowed to veto the bill, but suggested that he could accept the increase if Republicans agree to domestic spending hikes, the website noted. According to Bloomberg, the U.S. accounted for 28% of Elbit’s sales last year.
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