Stock Market Ranking: Why the Giant Elbit Systems Crashed by 9%
Defense giant Elbit Systems reported a 38% profit jump and a record $32 billion backlog, yet its stock plummeted 9%, losing third place to Bank Leumi. The decline highlights the dangers of sky-high market expectations. Meanwhile, Bank Hapoalim returned to the 100 billion shekel valuation club, and Palo Alto nears the unprecedented one-trillion shekel threshold.
Sometimes in the capital market, good reports are not enough. This week we received a perfect demonstration of this: Elbit Systems published strong second-quarter results by any measure, and yet the stock plummeted by about 9% and slid to fourth place in the ranking of the largest companies, after Leumi overtook it.
Elbit's revenues rose by about 16% to about $2.29 billion, net profit jumped by about 38%, and the order backlog climbed to a new record of $32 billion, with 73% of it coming from customers outside Israel.
So why did the stock go down? The answer lies in the pricing. After the sharp rises of the last year, Elbit's stock was traded at a price-to-earnings ratio of over 50, a very unusual level for a company that had never traded like this before.
When a stock is priced so high, the market has already "priced in" huge growth. The meaning: to justify the price, Elbit does not need to present good reports, and not even excellent ones, but dream reports, quarter after quarter. As soon as the results are only "excellent" and not "perfect", investors rush to realize profits. This is exactly what happened this week.
In an interview with ice, Elbit CEO, Butzi Machlis, tried to reassure. According to him, the European growth engine is still very far from exhaustion: many countries in the EU have not yet reached the new defense spending target of 5% of GDP, and as long as they are committed to meeting it, the flow of orders will continue, even if the security situation stabilizes.
Machlis noted that the company is increasing investments in expanding production capacity to $300 million per year, and continues to lead in the development of airborne laser systems for helicopters and fighter jets. His message is clear: the growth is here to stay. The question that remains open is whether the conversion rate of orders into actual revenue will satisfy the market's high expectations.
In the banking arena, the story was the opposite. Bank Hapoalim rose by 2.13% after publishing its reports, and returned to a value of over 100 billion shekels, for the first time since May. The bank presented a net profit of about 2.5 billion shekels and a return on equity of 15%, and approved a generous distribution of 1.24 billion shekels to shareholders.
However, a warning sign is hidden here: profit fell by 2.1% compared to last year, partly due to the interest rate cuts by the Bank of Israel which erode the bank's financial margin. This is perhaps the first time that the wind blowing at the banks' backs is starting to change direction, and this is something worth following in the rest of the reporting season.
And above them all, Palo Alto continued to gallop with an increase of 5.92% to a dizzying value of 957.86 billion shekels. The company is now a touch away from the trillion shekel threshold, a level that no company on the Tel Aviv Stock Exchange has ever crossed. As a reminder, this is an American company with a dual listing, whose pricing is determined on Wall Street.
This week is an important lesson for everyone who invests: a stock price reflects not only what is happening in the company, but mainly the expectations built around it. Elbit earned more, but not enough to justify expectations that soared to the sky.
