Elbit: Israeli Drones

07/22/2014 10:00 am EST

Focus: GLOBAL

Tyler Laundon

Editor, Cabot Small-Cap Confidential

Our latest recommendation is an Israel-based, defensive, small-cap play on global conflict, says Tyler Laundon, editor of 100% Letter.

Elbit Systems (ESLT) is Israel’s biggest publicly traded defense company. Though its market cap is only $2.5 billion, Elbit is the real deal, despite its small stature.

According to a Frost & Sullivan report, Israel has leapfrogged the US in terms of drone exports. From 2005 to 2012 the US shipped just $2 to $3 billion worth of drones overseas, while Israel shipped $4.6 billion worth.

Of course, there’s been a lot of talk about drone use beyond just military strikes. Increasingly, unmanned vehicles are being used to monitor borders, weather patterns and wildlife, map oceans and mountains, etc.

In the US, the FAA is considering lifting restrictions on commercial use of drones. That may lead defense companies like ESLT to apply their military expertise to commercial efforts.

It also manufactures a variety of airborne systems, and is the largest electro-optics company outside of the US making devices for gathering intelligence, identifying targets, and protecting soldiers for the US Marines, the US Navy, NATO forces, and the Israel Defense Forces.

Elbit also has a border security system branded as Peregrine. Just recently, US Customs and Border Protection inked a deal with Elbit to install the Peregrine system on the US–Mexico border.

The contract is worth $145 million, and initially calls for an installation in Arizona. Additional options could extend the contract for up to nine years and include additional installations.

Despite ESLT’s steady business the stock is cheap. Its price-to-sales (PS) ratio is just 0.86 and its trailing PE ratio is 13. Part of the reason the stock is cheap is that growth has been below 10% for the last couple of years.

But if revenue growth materializes as I expect in 2014 and 2015, the stock should begin to trade at a higher multiple.

ESLT is a stock with limited downside and a lot of upside. It is a steady company that pays a dividend and which is trading at a discount to its peers.

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