Eltek (ELTK): A High-Growth Play in Defense Electronics Amid Strategic Capacity Expansion

In the high-stakes arena of defense electronics, Eltek (NASDAQ: ELTK) has emerged as a standout performer, leveraging operational leverage and margin expansion to capitalize on a market starved for supply. With a 20% year-over-year revenue surge in Q2 2025 to $12.5 million and a gross margin leap to 24.1% (up from 15.6% in 2024), the company is not just surviving—it's thriving in a sector where demand outstrips capacity. For long-term investors, Eltek's strategic expansion, defense-sector dominance, and proactive cost management present a compelling case for growth.

Operational Leverage: The Engine of Margin Expansion

Eltek's recent financial performance underscores its ability to scale efficiently. The company's gross margin expansion from 15.6% to 24.1% in just one year is a testament to its operational discipline. This improvement stems from a favorable product mix (65–70% of sales from high-margin flex-rigid PCBs), full absorption of fixed costs, and cost-control measures. Management has emphasized that incremental revenue now contributes approximately $0.50 to gross profit per dollar—a critical threshold for scaling profitability.

The catalyst? A $6 million capital expenditure plan to install a 40-meter coating line by year-end 2025. This equipment, coupled with a 40% increase in electrical capacity and a 20% surplus in cooling infrastructure, will eliminate production bottlenecks. Once operational, the coating line is expected to unlock a $55–$65 million annual revenue potential—a 400–500% increase from current levels. The key here is operational leverage: as capacity ramps, fixed costs will be spread over a larger revenue base, amplifying margins.

Defense Sector: The 65% Revenue Engine

Defense electronics is a $120 billion global market, and Eltek is squarely positioned to benefit. In Q2 2025, defense accounted for 65% of total revenue, driven by robust demand in Israel and international markets. The company's ITAR compliance and AS-9100 certifications give it a unique edge in high-margin defense contracts, which often require specialized, high-reliability PCBs.

Management has secured $3.5 million in defense contracts for delivery through 2026, providing visibility and stability in a sector prone to volatility. With global defense budgets projected to grow at a 3.5% CAGR through 2027, Eltek's focus on this segment is both timely and strategic. The company's ability to scale production for defense clients—now operating at 65% capacity—positions it to capture a larger share of this expanding pie.

Labor and Pricing Strategies: Securing Future Demand

Eltek's proactive approach to labor and pricing is a critical differentiator. Facing a tight Israeli labor market, the company has submitted a formal application to hire foreign workers under a government program supporting the defense industry. If approved, this would enable seven-day-a-week production for defense lines, directly addressing capacity constraints.

On the pricing front, Eltek has adjusted its model to align with its NIS-based cost structure, mitigating risks from currency fluctuations. A one-time $1 million foreign exchange expense due to a 9% devaluation of the U.S. Dollar against the shekel was an anomaly, and management expects this strategy to stabilize margins. Additionally, the company is diversifying its supply chain by sourcing materials from the Far East and exploring partial offshore production, ensuring cost competitiveness without compromising quality.

Risks and Mitigants

While Eltek's trajectory is bullish, risks remain. Currency volatility, labor shortages, and geopolitical tensions could disrupt operations. However, the company has hedged these risks through inventory stockpiling, currency-aligned pricing, and regulatory engagement. Its debt-free balance sheet ($11.2 million in cash as of June 30, 2025) provides flexibility to navigate uncertainties.

Investment Thesis: A Scalable, High-Margin Play

For investors seeking exposure to the defense electronics boom, Eltek offers a rare combination of operational leverage, margin expansion, and strategic foresight. The company's $55–$65 million revenue target post-expansion, coupled with a gross margin trajectory toward 30%+, creates a powerful compounding effect. With defense demand locked in and capacity constraints being addressed, Eltek is poised to deliver outsized returns for those who invest before the expansion's full impact is realized.

Actionable Takeaway: Eltek's stock is undervalued relative to its growth potential. Investors should monitor the approval of its foreign worker application and the coating line's installation timeline. A breakout in Q4 2025 could signal the inflection point for a stock that's already outperforming peers in margin expansion and sector alignment.

In a world where defense spending is rising and supply chains are fragile, Eltek isn't just surviving—it's building a moat around its future. For long-term investors, this is a high-conviction opportunity.