Elbit Systems Ltd (ESLT, Financial) recently reported a daily loss of -2.21% and a three-month loss of -5.08%, with an Earnings Per Share (EPS) (EPS) of 5.97. This raises the question: is the stock significantly overvalued? In this article, we delve into a detailed valuation analysis of Elbit Systems to answer this question. Keep reading to gain valuable insights into the stock's intrinsic value.
A Snapshot of Elbit Systems
Elbit Systems Ltd is a renowned technology company known for its diverse portfolio of systems and products for aircraft, land, and naval applications. These products are widely used for defense, homeland security, and commercial flight capabilities. Elbit Systems guides its customers on product maintenance and provides support team specialists when needed. The company markets its systems and products as a prime contractor or as a subcontractor to government, defense, and homeland security contractors worldwide.
Currently, the stock price of Elbit Systems stands at $196.52, which is significantly higher than its GF Value of $142.79. This discrepancy prompts a deeper exploration of the company's intrinsic value.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded.
According to our valuation method, Elbit Systems (ESLT, Financial) appears to be significantly overvalued. The stock's current price of $196.52 per share is considerably higher than the GF Value Line, indicating overvaluation and potentially poor future returns. Conversely, if the share price were significantly below the GF Value Line, the stock might be undervalued and likely to deliver higher future returns.
Given the significant overvaluation of Elbit Systems, the long-term return of its stock is likely to be much lower than its future business growth.
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Elbit Systems' Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. Elbit Systems has a cash-to-debt ratio of 0.09, which ranks worse than 85.91% of 291 companies in the Aerospace & Defense industry. The overall financial strength of Elbit Systems is 5 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. Elbit Systems has been profitable 10 over the past 10 years. Over the past twelve months, the company had revenue of $5.70 billion and an EPS of $5.97. Its operating margin is 6.83%, which ranks better than 52.05% of 292 companies in the Aerospace & Defense industry. Overall, the profitability of Elbit Systems is ranked 8 out of 10, indicating strong profitability.
Growth is a crucial factor in the valuation of a company. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Elbit Systems's 3-year average revenue growth rate is better than 63.5% of 263 companies in the Aerospace & Defense industry. Its 3-year average EBITDA growth rate is 5.6%, which ranks better than 61.47% of 231 companies in the same industry.
ROIC vs WACC
The profitability of a company can also be determined by comparing its return on invested capital (ROIC) to the weighted average cost of capital (WACC). The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Elbit Systems's ROIC is 5.15, and its cost of capital is 8.89.
Conclusion
In conclusion, the stock of Elbit Systems gives every indication of being significantly overvalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 61.47% of 231 companies in the Aerospace & Defense industry. To learn more about Elbit Systems stock, you can check out its 30-Year Financials here.
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