Rising European Defense Budgets Will Create New Opportunities

Key Takeaways

• Growth in defense budgets in Europe and a balanced portfolio strategy could enhance Eltek's revenue prospects.
  
• Investment in machinery, production capacity, and skilled labor aims to improve efficiency and support scalable future growth.
  
• Operational challenges and competition threaten Eltek's revenue growth and profitability, alongside labor market difficulties and increased costs.

Catalysts

Manufactures, markets, and sells printed circuit boards (PCBs) in Israel, Europe, North America, India, the Netherlands, and internationally.

• Eltek anticipates growth opportunities from participating in local and international defense tenders, driven by increased defense budgets in Europe, which could enhance revenue.
  
• The strategic focus on a balanced portfolio across defense, medical, and high-end industrial sectors, along with an uptick in industrial activity, may boost future revenue streams.
  
• Securing long-term agreements is expected to enhance operational efficiency and production stability, potentially improving net margins.
  
• The completion of current investments, including new machinery and production capacity expansion, is expected to mitigate operational challenges, leading to increased production efficiency and potentially higher earnings.
  
• Efforts to recruit additional skilled labor and invest in personnel to support expansion may address production capacity constraints, facilitating future revenue growth and operational scalability.

Eltek Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eltek's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.1% today to 16.8% in 3 years time.
• Analysts expect earnings to reach $11.1 million (and earnings per share of $1.65) by about April 2028, up from $4.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the US Electronic industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.75%, as per the Simply Wall St company report.

Eltek Future Earnings Per Share Growth

Risks

• Revenue growth is constrained by operational challenges related to construction and installation of new equipment, and ongoing regional conflict, which could impact future revenue potential.
  
• Delays in equipment delivery and absence of foreign technicians due to regional conflict have led to production stoppages and increased defect rates, potentially affecting net margins and earnings.
  
• Increased manufacturing employee compensation costs and a shift in product mix have contributed to a decrease in gross margin from 28% in 2023 to 22% in 2024, indicating potential risks to profitability.
  
• Competition from European firms entering the Israeli market with aggressive pricing could pressure Eltek's pricing strategy and impact revenues.
  
• Challenges in recruiting additional employees and engineers in a tough labor market could lead to operational inefficiencies and increased costs, impacting net margins and earnings.

Valuation

• The analysts have a consensus price target of $18.0 for Eltek based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $65.9 million, earnings will come to $11.1 million, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 10.8%.
• Given the current share price of $8.45, the analyst price target of $18.0 is 53.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.