Elbit Systems (ESLT) reported excellent second-quarter financial results, and overall demand for the defense contractor’s products remains extremely strong. The company benefits from key developments across multiple geographic markets. Further, the company appears close to releasing its airborne laser, which, as I’ve noted in past columns, could easily become a huge blockbuster for the firm.
However, ESLT stock fell sharply after its Q2 results, apparently due to worries about its tax rate, supply constraints, and valuation. While these concerns are overdone, heightened competition in the aerospace market and political developments in the U.S. are more likely to affect the company’s performance in the medium-to-long term negatively.
Given the company’s rapid growth and strong positive catalysts, ESLT remains an attractive option for risk-tolerant growth investors. Indeed, the shares can easily double or triple in the next two or three years.
Superb Results and Enormous Demand
The company’s top line surged 16% versus the same period a year earlier to $2.29 billion, while net profit, excluding certain items, soared 32% year over year to $199 million. Further showing strong demand for Elbit’s products, its backlog jumped to $32 billion at the end of last quarter, up from $23.8 billion as of June 30, 2025, while the company said it is having difficulty meeting all the demand it is receiving.
Key Developments in Multiple Markets and the Imminent Arrival of the Airborne Laser
The company said demand for ESLT’s products from Europe remains strong, and most of last quarter’s backlog growth came from the continent.
Meanwhile, in line with my previous predictions that the firm would benefit from Israel’s increased defense spending, Elbit’s revenue from the country jumped 27% YOY last quarter to $855 million. Elbit also recently won two very impressive, large contracts from the U.S. Specifically, in July, it secured more than $370 million in deals from Customs and Border Protection, and a $212 million deal “for continuous production of ENVG-B systems.” CEO Bezhalel Machlis said the Army usually splits production of those products among multiple vendors, but this time decided to give the entire task to Elbit.
The CEO also noted that Elbit had provided unmanned ships to Israel and additional countries. The CEO of American drone maker Red Cat (RCAT) recently said there is “a ton of interest” among many countries in such ships. Consequently, selling unmanned vessels can become a big business for Elbit.
Airborne lasers can very cheaply shoot down missiles and drones, while they have important advantages over ground-based lasers. Specifically, airborne lasers are less likely to be derailed by weather conditions and have greater range than their ground-based counterparts. Encouragingly for ESLT stock, the CEO reported that the helicopter-mounted lasers “will be operational in a relatively short period of time,” and added that he did not know of any lasers that can be used by fighter jets. Elbit is currently developing such a product, he noted.
Also importantly, Israel’s ground-based lasers, marketed by a different Israeli firm, were not used during the country’s recent war with Hezbollah, are not yet operational, and may not be fully utilized for “three or four years,” according to an unnamed official who was quoted recently. Consequently, Israel could decide to buy more of Elbit’s lasers and fewer from its competitor.
Overdone Worries and More Legitimate Concerns
Among the concerns that reportedly caused ESLT stock to fall after the Q2 results were supply constraints, higher taxes, and the shares’ valuation. But Elbit is taking multiple steps to increase its supply.
For example, it has recently launched several new factories. The company paid only $32.7 million in tax last quarter, versus net income of nearly $200 million. Further, the firm is receiving R&D subsidies from Israel, and countries are providing funds to defray the costs of building factories. These subsidies should largely offset its rising tax bill. On valuation, shares are trading at a forward P/E of 55x. Given the company’s tremendous growth and strong, positive catalysts, that’s an attractive valuation.
But more serious is the decline in the firm’s aerospace revenue last quarter and the high likelihood of Democrats taking over Congress next year. Its aerospace revenue dropped 8% YOY last quarter, potentially indicating it’s being hurt by tougher competition in the drone space. Anti-Israel sentiment among Democrats in Congress could hurt the firm starting in 2027.
The company’s positive catalysts should far outweigh any damage from the competitive issue, and a majority of Congress and the White House will still be pro-Israel, so these issues should not greatly harm ESLT stock. Still, investors who buy ESLT stock should keep an eye on these matters.
*This article is intended to be informational only; it is not financial advice.
