A pandemic, inflation, commodity shortages, and supply chain challenges, coupled with geopolitical tensions, are brewing across different geographies in the world. As the Ukraine-Russia conflict continues, North Korea has conducted another missile test; Houthi rebels continue attacks in Yemen; and Taiwan is adopting a porcupine strategy in the wake of an existential threat from China.
These developments have inevitably put the spotlight on defense stocks in recent months. Stocks including Northrop Grumman (NOC), General Dynamics (GD) and Lockheed Martin (LMT) have seen rising investor interest.
Another avenue promising outperformance is major Israeli defense stocks. Israel is one of the ten biggest defense exporters globally, and has carved out a name for itself when it comes to innovation.
Let us take a look at two major Israeli defense stocks, and how they may fare in the coming periods.
Elbit Systems
While Lockheed Martin shares have gained about 13% in the past year, Elbit Systems (ESLT) shares have jumped nearly 58% in the same period!
It is involved in defense, homeland security, and commercial programs across the globe. Operating areas range from aerospace, land, and naval systems, communications, intelligence surveillance, and reconnaissance to unmanned aircraft systems, advanced electro-optics, radios, cyber-based systems, and munitions.
The company’s topline has steadily ticked upwards from $3.38 billion in 2017 to $5.28 billion in 2021. At the end of the company’s most recent fourth quarter, the order backlog stood at $13.7 billion, which provides robust revenue visibility. Almost 72% of this backlog comes from outside Israel.
Elbit has been investing in bolstering its technological capabilities and expanding footprint in key global defense markets. In Q4, its R&D spending was 7.6% of its revenue. The results of these investments are visible in new contracts across geographies in 2022.
These contracts include a $53 million five-year contract with the UAE Air Force; the supply of Hermes 900 unmanned aircraft systems to the Brazilian Air Force; the supply of the Albatross combat management systems to the Royal Swedish Navy; and a $130 million contract to deliver an artillery munitions production line in an Asia-Pacific country.
Additionally, Elbit also received a $27 million contract to provide NATO-compliant ammunition for Sweden’s Leopard main battle tanks in March. Moreover, this week, the company also received a $49 million contract to provide night vision goggle systems to the U.S. Marine Corps.
Moreover, on May 10, Israel’s DDR&D and Elbit Systems unveiled the project ‘The Edge of Tomorrow,’ which is focused on increasing synergies between individual soldiers and their teams. Elbit is acting as the project’s integrator.
Additionally, Elbit also upped its dividend by 8.7% to $0.50 per share in Q4. Despite the price surge this year, the stock still seems to be reasonably priced at a price to sales ratio of 2.18.
First-quarter reports are expected on May 24. The Street expects the company to post earnings per share (EPS) of $1.54. For the comparable year-ago period, Elbit posted EPS of $1.57 versus the Street’s estimate of $1.18.
RADA Electronic
The second name on our list, RADA Electronic Industries (RADA), has seen its share price surge nearly 9.5 times in the last five years.
The company has a focus on proprietary radar solutions and legacy avionics systems and caters to markets including active military protection, counter-UAS missions, critical infrastructure protection, and border surveillance.
This month, RADA posted lower-than-expected first-quarter numbers, which resulted in its share price declining to around $11 from $13.7 on May 9. The 10.7% drop in Q1 revenue ($22.51 million) was attributable to a more than five-month delay in continuing resolution in government appropriations to federal agencies in the U.S.
Nonetheless, the company saw around 22% growth in bookings and reiterated revenue guidance of $140 million for 2022.
The CEO of the company, Dov Sella, commented, “The unfortunate war in Europe, which has led to a global awakening to the need for active defense solutions (VSHORAD, C-UAS, APS) much sooner than previously foreseen, will no doubt strongly benefit our business over the near future.”
This bigger picture is also visible in the company’s growth, with its top-line expanding from $26.2 million in 2017 to $117.2 million in 2021. Further, the company is targeting organic growth to reach $250 million in revenue in the next three to four years through mergers and acquisitions (M&A) as part of the strategy.
Despite the decline in price this month, RADA is trading at a price to sales ratio of 6.98, which makes it seem expensive when compared to Elbit.
A TipRanks smart score of seven indicates the stock may perform in tandem with the broader markets in the coming period. Nonetheless, RADA has outperformed Elbit as well as bigger names such as Lockheed Martin and Northrop for more than two years now.
Closing Note
The outperformance of both Elbit and RADA stands out. These companies stand to gain even further as they expand their geographic presence, notch contract wins, and notably, continue to innovate. As countries around the world focus on increasing defense spending, both RADA and Elbit should benefit.
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