When you hear the word "drone," do you picture a small robotic airplane, flying through the sky bearing a stars-and-stripes decal on its chassis? If you do, then chances are you live in America.
Because for most of the world, drones more often than not bear the flag of Israel as an insignia.
According to CNN, the state of Israel is the largest exporter of drones and drone technology in the world. Leading Israeli defense concern Israel Aerospace Industries, or IAI, counts as its customers the military forces of more than two-dozen nations around the world. These customers buy Israeli drones first and foremost because they're easier to acquire than American models -- where sales can be held up by government restrictions on drone exports. But customers also flock to buy Israeli drones because they work.
In fact, they work so well that Israel may be replacing its manned combat aircraft with robotic drones.
Building a drone empire in the Middle East
Israel recently announced a plan to retire 33 Textron (NYSE:TXT) AH-1 Cobra helicopter gunships. News reports suggest that the Cobras' role will, in the future, be taken over by unmanned "drone" aircraft -- armed to the teeth with air-to-surface guided missiles. Already, one former Israeli Cobra squadron is said to have been equipped with Israeli "Hermes 900" unmanned aerial vehicles.
While Israel's defense ministry won't comment on reports of its possessing "weaponized" drones, media outlets around the Middle East have reported seeing Israeli drones conducting armed operations as far back as 2006. This backs up rumors of a shift to armed drones. And there would be sound logic supporting such a move, if it is indeed happening.
UAVs offer many advantages over piloted helicopters. Piloted remotely, they eliminate the risk of Israeli pilots being killed or wounded in combat -- or taken prisoner. Israel's drones can also fly for 12 hours and up, versus about 90 minutes for an AH-1 Cobra. They're cheaper to operate -- and in many cases, cheaper to buy.
An Elbit Systems (NASDAQ:ESLT) Hermes 450 drone can fly for up to 20 hours without refueling, and is big enough to carry a pair of Hellfire missiles on its wings. It costs only $2 million -- about one-fifth the cost of a modern Cobra. A larger IAI Heron, priced similarly to a Cobra, can stay aloft even longer -- up to 52 hours straight. Israel is believed to have loaded (and fired) homegrown "Spike" missiles (similar in size to Hellfires) aboard Herons on combat missions in both Lebanon and Gaza -- although Israel refuses to confirm this.
Israel includes upwards of 60 drones in its own air fleet, with dozens more having been sold abroad. Weapons-capable Israeli drones range in size from IAI's tiny Panther, Bird Eye, and Ghost UAVs, to Elbit's Hermes 450 and Hermes 900 (1.1 tons, and with twice the Hermes 450's missile payload), to IAI's larger Heron and Heron TP drones -- the latter a beast massing 4.6 tons and capable of flying at altitudes up to 45,000 feet.
Offering buyers drones for just about any mission they can think up, Israel holds a commanding position in the international market for unmanned aerial vehicles. And as military tech website StrategyPage points out, thanks to Israel's near-constant state of hostilty with its neighbors, its drones are all "combat proven."
Israel's armed drones -- a threat to U.S. defense contractors?
Already the leading international seller of drones and drone technology, Israel's increasing (if unconfirmed) experience with use of armed drones in combat will only heighten its competitive advantage over U.S. defense contractors, which sell mainly unarmed drones internationally.
Of the two leading drone manufacturers in Israel, only one is publicly traded: Elbit Systems. With under $3 billion in annual sales, the company is small enough that even a small uptick in international drone sales could "move the needle" on the stock. What's more, analysts call Elbit's Hermes 900 drone "the most likely candidate for an Israeli attack drone to replace the Cobra" in the home market as well.
Bot these facts make Elbit an intriguing pick for investors in the defense industry, willing to look beyond U.S. borders. And the best part? Elbit also trades for an attractive valuation of just 0.9 times annual sales, a cheaper price than you'll find at just about any U.S.-based defense contractor.
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Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Textron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.