Elbit Systems (ESLT): A High-Conviction Play in the Defense Sector

In the volatile landscape of global defense, few companies have demonstrated the resilience and innovation of Elbit Systems (NASDAQ: ESLT). As of August 2025, the Israeli defense giant is poised to capitalize on a confluence of tailwinds: a record $23.8 billion order backlog, margin expansion driven by operational efficiencies, and surging international demand for its advanced technologies. For investors seeking a high-conviction play in the defense sector, Elbit's strategic positioning and financial discipline make it a compelling case study.

Strategic Backlog: A Catalyst for Sustained Growth

Elbit's order backlog as of June 30, 2025, stands at $23.8 billion, with 68% of the value attributed to international markets. This backlog is not just a number—it's a testament to the company's ability to secure long-term contracts across geographies. Notably, 46% of the backlog is scheduled to be executed in 2025 and 2026, ensuring a steady revenue stream in the near term.

The backlog is underpinned by contracts like the $1.635 billion European deal for precision strike systems, ISTAR capabilities, and digital battlefield solutions. Such projects reflect Elbit's shift toward integrated, multi-domain solutions tailored to modern warfare. The company's industrial cooperation clauses in these contracts also position it to strengthen local defense ecosystems, fostering long-term partnerships.

For context, Elbit's backlog dwarfs its 2024 revenue of $7.3 billion, implying years of revenue visibility. This is critical in a sector where geopolitical volatility can disrupt short-term planning. With 68% of the backlog international, Elbit is effectively diversifying its risk away from Israel's domestic market, a strategic move that enhances its appeal to global investors.

Margin Expansion: Operational Excellence and Cost Discipline

Elbit's financial performance in Q2 2025 underscores its operational prowess. Non-GAAP operating margins expanded to 8.9% of revenue, up from 8.0% in 2024, driven by improved gross margins and disciplined cost management. The company's GAAP operating income hit $157.8 million, a 35% year-over-year increase, while non-GAAP net income surged to $151 million, reflecting a 64% jump.

Key drivers of this margin expansion include:
1. Operational Leverage: Increased production of precision-guided munitions and unmanned systems has reduced per-unit costs.
2. R&D Efficiency: R&D expenses fell to 6.6% of revenue in Q2 2025 from 7.2% in 2024, as the company optimized its innovation pipeline.
3. Tax Optimization: A 5.6% effective tax rate in Q2 2025, compared to 13.2% in 2024, boosted net income.

CFO Kobi Kagan has emphasized the role of ERP system upgrades and supply chain automation in driving these efficiencies. Meanwhile, CEO Bezhalel (Butzi) Machlis has highlighted the company's focus on “profitability without compromising innovation,” a balance that is rare in capital-intensive sectors.

Global Demand: From Europe to Emerging Markets

Elbit's growth is not confined to its traditional markets. The company has secured a $260 million contract with Airbus Defence and Space to supply J-MUSIC™ DIRCM systems for the German Air Force's A400M fleet, a 6-year deal that underscores its European footprint. Additionally, the $1.635 billion European contract includes industrial cooperation to bolster the buyer's domestic defense capabilities—a trend that aligns with NATO's push for self-reliance.

Emerging markets are also gaining traction. Elbit's loitering munitions, electro-optic systems, and cyber solutions are in high demand in Asia-Pacific and the Middle East, where defense budgets are expanding. The “Swords of Iron” conflict has further accelerated demand from the Israel Ministry of Defense, with two $260 million contracts for airborne munitions in Q2 2025.

What sets Elbit apart is its ability to adapt to regional needs. For instance, its IronBeam high-power laser system, set for deployment by year-end, addresses both Israeli and international counter-drone requirements. The company's Ramat Pita production site, equipped with AI and robotics, will further scale output to meet global demand.

Investment Thesis: A High-Conviction Play

Elbit Systems is a rare combination of a robust backlog, margin expansion, and global demand. Its $23.8 billion backlog provides a clear revenue runway, while its operational efficiencies ensure profitability. The company's focus on emerging technologies—such as AI-enabled munitions and directed-energy systems—positions it to lead the next wave of defense innovation.

For investors, the key risks include geopolitical volatility and supply chain disruptions. However, Elbit's diversified international contracts and strong cash flow generation (Q2 2025 free cash flow of $71 million) mitigate these concerns. The recent $588.8 million public offering further strengthens its balance sheet, funding production expansion and potential M&A.

Recommendation: Buy Elbit Systems (ESLT) for a long-term hold. The stock's 55% year-over-year EPS growth and 46% of its backlog scheduled for execution in 2025-2026 justify a premium valuation. Investors should monitor the company's progress on the IronBeam project and its ability to maintain margin expansion amid rising input costs.

In a world where defense spending is no longer a cyclical trend but a structural shift, Elbit Systems is not just surviving—it's thriving. For those seeking a high-conviction play in the defense sector, the case for ESLT is compelling.