Executive Summary / Key Takeaways

• Elbit Systems (NASDAQ:ESLT) stands at the forefront of a global defense super cycle, driven by escalating geopolitical tensions and increasing defense budgets worldwide, translating into record order backlogs and robust financial performance.
• The company's core investment thesis is anchored in its unique ability to deliver integrated, cutting-edge defense solutions across air, land, naval, and cyber domains, underpinned by significant technological differentiators like high-power lasers and advanced counter-UAS systems.
• ESLT has demonstrated exceptional financial momentum, with double-digit year-over-year growth in revenues, operating profit, net profit, and EPS across recent quarters, supported by strategic operational efficiencies and a successful capital raise.
• Management projects continued strong growth, targeting over $7 billion in revenues and a 10% non-GAAP operating margin by 2026, alongside an ambitious EPS target of $12 by the same year, reflecting confidence in its strategic initiatives and market demand.
• While geopolitical sensitivities and production capacity remain key considerations, Elbit's extensive global presence through subsidiaries and strategic partnerships mitigates risks and positions it for sustained expansion in a dynamic defense landscape.

The Global Defense Imperative: Elbit Systems' Strategic Foundation

The global defense industry is experiencing an unprecedented surge, a "super cycle" propelled by escalating geopolitical tensions, particularly the ongoing conflict in Ukraine and the "Swords of Iron War" in the Middle East. This environment has spurred governments worldwide to significantly increase defense budgets, with Europe alone seeing a dedicated budget of EUR150 billion for re-armament and a proposal to reach 5% of GDP in defense spending by 2032. Against this backdrop, Elbit Systems Ltd. (NASDAQ:ESLT), an Israeli-based defense technology powerhouse, has strategically positioned itself as a critical enabler of modern battlefield superiority.

Elbit's journey, since its incorporation in Haifa in 1966, has been one of continuous evolution from a computer-focused entity to a diversified military supplier. This transformation was largely driven by strategic mergers and acquisitions, such as the pivotal integration of IMI Systems Ltd., which consolidated land-related solutions into a single division. This move allowed Elbit to offer comprehensive, turnkey land systems rather than disparate products, a significant competitive advantage. The acquisition of Night Vision further bolstered its capabilities, enabling the company to combine its diverse portfolio into integrated solutions for infantry soldiers in the U.S. and internationally. Conversely, Elbit has also strategically divested less synergistic activities, optimizing its focus and resource allocation.

The company's overarching strategy centers on providing integrated, advanced defense solutions, acting as a transformative partner for its customers. This approach is rooted in its extensive operational experience and a wide portfolio that connects various technologies into coherent, advanced systems, enabling countries to "leapfrog with its operational capabilities." Elbit's global footprint, comprising approximately 40 subsidiaries worldwide with only 14,000 of its 22,000 employees based in Israel, is a cornerstone of its competitive positioning. This decentralized structure allows for localized development, production, and job creation, fostering economic benefits in host countries and diversifying its market reach beyond direct Israeli exports. This model also facilitates strategic collaborations, such as partnerships with Airbus (EADSY) and KNDS in Europe, to promote key systems like the DIRCM and PULS rocket solutions.

Technological Edge: The Core of Elbit's Moat

Elbit Systems' competitive advantage is deeply embedded in its technological differentiation and relentless innovation. The company consistently invests in R&D to develop cutting-edge products and solutions, maintaining its position as a market leader. Net R&D expenses in Q2 2025 were $129.7 million, representing 6.6% of revenues, demonstrating a sustained commitment to innovation.

A prime example of Elbit's technological leadership is its High-Power Laser Solutions, notably the Iron Beam system. Elbit is developing and delivering the high-power laser source for this solution, with Rafael serving as the main integrator. Deliveries of the first unit to Rafael for integration are expected "quite soon," with deployment of the land-based system anticipated by the end of 2025. This technology offers a robust and economical defense against a variety of threats, providing a significant advantage in modern warfare. In parallel, Elbit is leading the development of a prime and airborne high-power laser solution for the Israeli Air Force, a project garnering "a lot of interest for this solution for other customers -- international customers as well globally". This dual-platform approach positions Elbit as a global leader in high-power laser technology, with the potential to create a "huge change in the way countries are fighting mainly against storms".

Another critical differentiator is the ReDrone Counter-UAS Solution. This multisensor and multi-mission system integrates radar, electro-optical (EO), and Signals Intelligence (SIGINT) detection technologies with both soft-kill (jamming, energy weapons) and hard-kill effectors. Successfully deployed by the IDF and exported to NATO members like the Dutch Army, ReDrone is described as "one of the most advanced solutions, which is available in the market right now," significantly enhanced by AI integration. This comprehensive approach to counter-drone measures provides a superior, integrated defense against evolving aerial threats.

Elbit's PULS (Precise and Universal Launching Systems) Rocket Launcher further exemplifies its innovative edge. This scalable artillery system can launch 100 rocket types from a single platform, covering ranges from 35 kilometers up to 300 kilometers. Its "agile and scalable features" have made it a "key win" for customers, leading to its selection by multiple European countries, including Germany, the Netherlands, and Denmark. This versatility and range capability offer a distinct advantage over less adaptable systems.

Additionally, the Iron Fist Active Protection System provides 360-degree protection for armored platforms against anti-tank rockets, guided missiles, UAS, and loitering threats. Its high performance, low volume, low weight, and low power requirements make it a highly effective and efficient solution for enhancing vehicle survivability. The company also offers the advanced UT30 Unmanned Turret System for armored fighting vehicles and the SBNVG (Squad Binocular Night Vision Goggle) for low-light operations, securing a $110 million delivery order from the U.S. Marine Corps. These technologies collectively contribute to Elbit's competitive moat, enabling higher average selling prices, lower operational costs for customers, and stronger margins for the company by addressing critical defense needs with superior solutions.

Financial Performance and Operational Excellence

Elbit Systems has delivered an exceptional financial performance, marked by consistent double-digit growth across key metrics. For the second quarter of 2025, revenues surged to $1.973 billion, a significant increase from $1.626 billion in Q2 2024. This growth was broad-based, with Europe contributing 29% of revenues, North America 21%, Asia Pacific 13%, and Israel 34%. The company's order backlog as of June 30, 2025, reached a record $23.8 billion, representing a 12% increase from the corresponding quarter in 2024 and providing substantial revenue visibility for years to come. Approximately 68% of this backlog is from international orders, underscoring global demand.

Profitability has also seen a healthy expansion. Non-GAAP operating income for Q2 2025 was $175.1 million, or 8.9% of revenues, up from $130.5 million, or 8% of revenues, in Q2 2024. This margin expansion is a direct result of the company's "joint effort to improve profitability," including the successful implementation of a new ERP system that is now fully operational across the company, streamlining processes and enhancing efficiency. Non-GAAP diluted EPS for Q2 2025 was $3.23, a substantial increase from $2.08 in Q2 2024.

Cash flow generation has been robust, with free cash flow totaling $71 million in Q2 2025. For the six months ended June 30, 2025, cash flow from operating activities was $304 million, a significant improvement from $26 million in the prior year, primarily driven by the strong increase in net income. This strong liquidity was further bolstered by a successful share offering in Q2 2025, which raised $573 million net. These proceeds are earmarked for increasing production capacity, meeting growing demand, and potentially funding strategic M&A activities to acquire new technologies or expand global reach. The company's commitment to shareholder returns is evident in the Board's decision to increase the dividend to $0.75 per share, a 50% increase from the previous year and the second raise this year.

Segmental performance highlights the diverse drivers of growth. The Land segment emerged as the largest, with revenues increasing by 45% in Q2 2025 due to strong ammunition and munition sales in Israel and Europe. This segment is expected to "continue to grow in revenue and also -- expand also the margins". Aerospace revenues increased by 12%, driven by precision-guided munitions and UAS sales. C4I and Cyber revenues grew by 21%, fueled by radio systems and command and control solutions. ISTAR and EW revenues saw a 15% increase, mainly from electro-optical and electronic warfare systems. Elbit Systems of America (ESA) also demonstrated a turnaround, moving from a loss in 2023 to margin expansion, with the expectation that "Q3 will be the last quarter of Sparton, the maritime company with the last quarter losing contracts".
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Competitive Landscape and Strategic Positioning

Elbit Systems operates within a highly competitive global defense market, facing direct competition from industry giants such as Lockheed Martin (LMT), Raytheon Technologies (RTX), Northrop Grumman (NOC), and General Dynamics (GD). While these larger U.S.-based contractors often lead in overall scale and market share due to their dominant roles in large-scale programs and extensive R&D budgets, Elbit differentiates itself through its agility, specialization, and integrated solutions approach.

Elbit's offerings in electro-optic and unmanned systems provide a unique value proposition through adaptable solutions tailored for diverse environments, such as advanced countermeasures and cyber intelligence. This allows Elbit to offer greater flexibility in asymmetric warfare scenarios, often with more cost-effective, tailored systems for international clients. For instance, in electronic warfare and signal intelligence, Elbit's solutions may demonstrate greater efficiency in deployment for specific operational needs, giving it a competitive edge in customization compared to Raytheon Technologies' emphasis on component-level technologies.

In the land systems segment, Elbit's focus on full turnkey solutions, including advanced protection and survivability features like integrated laser systems for vehicles, provides enhanced performance in high-threat environments. While General Dynamics leads in production scale and U.S. contracts for armored vehicles, Elbit's strategy prioritizes innovation in protection technologies, potentially giving it an edge in adaptability. The company's PULS system, with its versatile range and ability to launch 100 rocket types from a single platform, has been a "key win" against competitors, demonstrating its technological superiority in artillery solutions.

Elbit's extensive international presence through approximately 40 subsidiaries worldwide is a significant competitive advantage. This network allows the company to engage with customers locally, facilitating local development, production, and job creation, which boosts local economies. This approach helps Elbit mitigate "some resistance to buy from Israeli companies" in certain regions, such as France, by offering a localized value proposition. This global operational model contrasts with more U.S.-centric competitors, enabling Elbit to exploit opportunities in diverse international markets.

Outlook and Growth Trajectory

Elbit Systems' management has articulated a confident outlook, projecting continued strong growth in the coming years. The company's internal targets include achieving "mid-teens" revenue growth for 2025 and "double-digit growth" for 2026. More specifically, Elbit aims to reach "over $7 billion" in revenues by 2025, an internal goal that management notes is "almost there already," implying exceeding this target. The company also targets a "10% non-GAAP operational profitability in 2026" and an EPS of "$9 next year and $12 in 2026," effectively aiming to double its EPS from 2023 to 2026.

These ambitious targets are underpinned by several strategic initiatives. Elbit is actively expanding its production capacity, with the Ramat Beka munition production site expected to be "operating with dozens of production lines" by the end of 2025, while maintaining production at the Ramat Hasharon site until the end of 2026. This expansion is crucial for converting the record backlog into revenues, as "execution -- is our ability to produce stuff" is identified as the main bottleneck. The company is also leveraging its fully operational new ERP system to enhance efficiency and reduce costs, and integrating AI and robotics into manufacturing processes.

Management continues to pursue strategic M&A opportunities to acquire new technologies and expand its global market position, stating, "we are looking intensively for additional acquisitions for the company. We are looking for new technologies which we miss in our portfolio and we're also looking for new positions in the international market". This proactive approach to portfolio management, combined with a focus on high-demand products and integrated solutions, positions Elbit for sustained growth.

Risks and Challenges

Despite the compelling growth narrative, Elbit Systems faces several risks inherent to the defense industry and its unique operating environment. Geopolitical sensitivities, particularly regarding its Israeli origin, can lead to "some resistance to buy from Israeli companies" in certain markets. While Elbit mitigates this through its extensive network of international subsidiaries and partnerships, such sentiments could still impact contract awards in specific regions.

Operational execution remains a critical challenge, especially given the rapid expansion of production capacity required to meet the surging demand. Delays in facility construction, such as those experienced at the Ramat Beka site due to regional conflicts, could impact revenue recognition and profitability. Furthermore, the rapidly growing backlog necessitates higher levels of working capital expenditure, which could strain liquidity if not managed effectively.

The defense industry is also subject to governmental budgeting priorities and regulatory approvals, which can introduce volatility. While the current environment favors increased defense spending, shifts in political landscapes or economic downturns could alter these trends. Competition from larger, well-resourced global defense contractors also presents a continuous challenge, requiring Elbit to maintain its technological edge and strategic agility.

Conclusion

Elbit Systems is a compelling investment opportunity, strategically positioned to capitalize on the robust and expanding global defense market. Its history of innovation, coupled with a proactive approach to mergers and acquisitions, has forged a diversified portfolio of cutting-edge defense technologies. The company's unique ability to deliver integrated solutions, from high-power lasers and advanced counter-UAS systems to comprehensive land and aerospace platforms, provides a significant competitive moat in a world increasingly focused on national security.

The recent financial performance, characterized by strong double-digit growth in revenues, operating income, and EPS, along with a record backlog, underscores the effectiveness of its strategy and operational execution. Management's clear guidance for continued growth and margin expansion, supported by investments in production capacity and technological advancements, paints a promising picture for the future. While geopolitical risks and the demands of scaling production present challenges, Elbit's global presence and strategic partnerships offer resilience. The company's technological leadership and ability to provide transformative defense capabilities position it as a key player in modernizing global defense systems, making ESLT a noteworthy consideration for discerning investors seeking exposure to the defense sector's current super cycle.