Defense Stock Plummets 80% From Peak, Awaiting New Budget

Defense stocks, once the hottest commodity on the local market, have seen a significant downturn in recent months. While the ongoing wars in Ukraine and the Middle East initially fueled a surge in defense budgets and orders for Israeli companies, leading to record stock prices, a combination of high valuations and a perceived decrease in military conflict intensity has caused a sharp correction. The defense index has fallen 38% from its March peak, while the broader Tel Aviv 35 index has remained largely unchanged.

Imco, a company specializing in electronic systems for military vehicles and controlled by the Yakir family, has been particularly hard hit. Its stock has dropped nearly 80% from its late January high, now valued at approximately 135 million shekels. This decline is attributed to reduced revenues and order backlogs, especially from the Ministry of Defense, which accounts for 42% of Imco's sales. The company reported a 6.7% decrease in revenue and an 80% drop in net profit for the first half of the year, partly due to increased labor costs associated with expanding its workforce and opening a new factory in Romania.

Imco's CEO, Ariel Kandel, noted that a significant portion of new orders are frozen due to budget discrepancies and that the company is awaiting delayed payments from the Ministry of Defense. Despite these challenges, Kandel expressed confidence in the company's resilience and its strategic expansion into European markets, viewing the Romanian factory as a crucial growth engine. The company is also working to reduce its reliance on the Ministry of Defense.

Adding to Imco's recent troubles was a reported cyberattack in late April by an Iranian-affiliated group, though the company stated its investigation found no active or ongoing malicious activity and that the incident had no material impact on business operations. Historically, Imco has experienced volatility, including management changes and financial difficulties, but the "Swords of Iron" war initially led to a massive stock surge of over 1,100% from its wartime low to a record high earlier this year. The Yakir family had explored selling their stake at the peak but the deal did not materialize.

Looking ahead, Imco anticipates a return to normal order flow from the Ministry of Defense following the approval of new budgets and elections. The company remains optimistic about continued growth in the European defense market, citing long-term multi-year projects and a persistent demand that contrasts with public declarations of peace.