WIth contributions from Xenel Nazar.
Elbit reported Q4 results on Tuesday, March 20th. The financial results were in-line with our expectations.
Financial Model Impacts
– Gross margin in 2018 should be similar to the last 4 to 6 quarters.
_”So without giving you specific guidance, I think if you look back on what has happened in the last 4 to 6 quarters on average, that may be something that could be representative of the future.”_
– General & Administrative expense in Q4 could again occur, although likely by lesser amounts.
_”I note that during 2017, and particularly during the fourth quarter, we had a significant decrease in G&A expenses as a result of a re-evaluation of liabilities related to assets and activities acquired in the prior year.”_
– No specific financials or timing of the IMI Systems deal.
– “Revenue from Contracts with Customers” (ASC 606) – Implementation began on Janurary 1, 2018. The impact is not material to earnings.
Our Thoughts
We were hoping that Elbit Systems would provide at least some details on the potential impact IMI Systems would have on the company’s model. Given that the deal has yet to officially close, Elbit was understandably quiet on any impact. The combination of not providing guidance (which is not normal industry practice) and a lack of clarity on IMI’s impact and timing leaves too many near-term question marks for a company clearly set to benefit from Global increases in technology defense spending.
In combination with a $130 support trend being broken, we recommend investors stop accumulating shares of ESLT until further details on IMI Systems are made.
– Elbit has broken a key support level at $130. While a lot of this is the market moving lower, we can not ignore these pricing trends. In the absence of a catalyst, The stock appears set to follow the technicals and the direction of the market.
– P/E multiples have come down for the industry. Lockhead and Raytheon have both provided guidance and as a result, can provide investors with more confidence to value the stock on a 2018 EPS basis. Elbit Systems does not provide guidance and as a result, has typically traded at a discount to its larger peers.
– We are not adjusting our model for IMI Systems until more detailed financials are disclosed – In terms of the financial model, there are a number of segments that will see an increase in revenue as a result of IMI merging with Elbit. We pull together some impacts based on the comments from Elbit CEO Bezhalel Machlis
“_The acquisition of IMI will allow us to sell more, mainly around the world, and allow more production._”
Electro-Optic and Countermeasures Systems are driven by IMI’s complimentary Rockets and Long-range Artillery – “_IMI has an advanced line of artillery rocket and precise long-range artillery war cats. Elbit brings an advanced ISR solution with constant surveillance and command control systems. Combining the two will enable us to provide a comprehensive solution and an operational solution for potential customers. And we see opportunities for that around the globe._”
Land Vehicle Systems growth – “_IMI is the leading provider of advanced ammunition, air-to-ground, ground-to-ground, different types of ammunition. Elbit brings advanced electronics. Combining the two creates a strong precise ammunition portfolio and we see a lot of demand for precision around the globe to avoid collateral damage._”
Another Catalyst for Land Vehicle Systems – “_We have systems for ground platforms, mainly sites, for our control system, life support systems, and communications and command control solutions. IMI brings a different type of protection solutions, reactive and active systems. It’s really advanced. Really modern. Very attractive, active, advanced protective solutions. They do also borrow. They do additional elements and combining those activities with their activities will enable us to bring very advanced solutions for customers around platforms._”
Financial Summary
Sales were 2% above our expectations ($1 billion vs. our estimate of $991 million), GAAP EPS was $1.62 (us 1.91) and adjusted Non-GAAP EPS was $2.01 versus our estimate of $2.05.
Q4 Results
Source: Perspectec
Q1, Q2 and Fiscal 2018 Forecast
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For the purposes of complying with NYSE, NASDAQ and all Self-Regulatory Organizations, Perspectec Inc. has assigned the following rating system BUY, HOLD/NEUTRAL, SELL for the securities which are the views expressed by an analyst, Independent contractor, and or an employee of Perspectec Inc. The information and opinions in these reports were prepared by Perspectec Inc. or an analyst, independent contractor. Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Perspectec Inc. makes no representation as to its accuracy or completeness.
