Executive Summary / Key Takeaways

• Eltek Ltd. (NASDAQ: ELTK) is undergoing a significant operational transformation through an accelerated investment program, aiming to expand its high-reliability PCB production capacity to support annual revenues of $55 million to $65 million.
• The company's core investment thesis hinges on its specialized technology in complex, custom-designed PCBs for critical sectors like defense and medical, where demand remains robust and growing globally.
• Recent financial performance in Q2 2025 showed strong revenue growth of 20% year-over-year to $12.5 million and a substantial gross margin expansion to 24.1%, signaling a recovery from earlier operational challenges and the absorption of fixed costs.
• Key strategic initiatives, including the installation of new state-of-the-art coating and plating lines, an ERP system overhaul, and efforts to address labor shortages, are designed to enhance efficiency, quality, and long-term profitability.
• Investors should monitor the successful ramp-up of new production lines, the effective integration of foreign workers to boost capacity, and the company's ability to sustain gross margins in the targeted 26%-29% range in the medium term.

Eltek's Foundation: Precision PCBs for Critical Industries

Eltek Ltd., established in 1970 and headquartered in Petah Tikva, Israel, has carved a specialized niche in the global printed circuit board (PCB) market. As a subsidiary of Nistec Golan Ltd., Eltek designs, manufactures, and sells technologically advanced PCBs, including complex rigid, double-sided, multi-layer, flexible circuitry, and high-density boards. These critical components serve demanding industries such as medical technology, defense and aerospace, high-end industrial, telecom, and networking equipment across Israel, North America, India, and Europe. The company's enduring presence in these sectors underscores its foundational strength in delivering high-reliability solutions where precision and performance are paramount.

The PCB industry, particularly in high-end applications, is characterized by stringent quality requirements, long product lifecycles, and a constant need for technological advancement. Geopolitical tensions and increasing global defense budgets are significant tailwinds, driving sustained demand for Eltek's defense-related products. Similarly, advancements in medical technology and industrial automation ensure a steady need for sophisticated PCBs. Eltek's strategy is to maintain a balanced portfolio across its core segments while strategically expanding its commercial sales, which are less constrained by current production capacity.

Eltek's core technological differentiation lies in its expertise in custom-designed, high-density, and flex-rigid PCBs. These products are not commodity items but rather intricate components requiring advanced manufacturing processes and specialized know-how. For instance, the company's rigid-flex PCBs, which constituted 65% to 70% of total revenues in Q2 2025, typically command higher prices and contribute more significantly to profits due to their complexity and performance advantages. The tangible benefits of Eltek's technology include superior reliability in extreme environments, crucial for defense and aerospace applications, and the ability to integrate more functionality into smaller footprints, vital for compact medical devices. While specific quantifiable metrics on performance advantages over alternatives are not publicly detailed, the company's consistent demand in these critical sectors implicitly validates its technological edge. Eltek's ongoing investment in state-of-the-art production lines, such as the new 40-meter coating line and advanced plating lines, aims to further enhance quality, efficiency, and expand its capabilities for new technologies. This technological roadmap is central to Eltek's competitive moat, enabling it to secure long-term contracts and maintain pricing power in its specialized markets.

Competitive Landscape and Strategic Positioning

Eltek operates within a competitive global PCB market, facing both larger, diversified electronic manufacturing services (EMS) providers and more specialized regional players. Key direct competitors include TTM Technologies (TTMI), Sanmina Corporation (SANM), Jabil Inc. (JBL), and Flex Ltd. (FLEX). These companies offer similar custom PCB design and production services across overlapping industries.

Compared to larger players like TTM Technologies, Eltek's market positioning is more regionally focused, particularly strong in Israel and Europe, where it leverages established local expertise. While TTM benefits from a broader global footprint and scale for large-volume contracts, Eltek's strength lies in its agility and specialization in highly customized, niche markets. Eltek's direct sales approach and subsidiary status under Nistec Golan Ltd. may offer integrated supply chain benefits and closer customer relationships for specialized needs. Financially, Eltek's gross profit margin of 21.55% (TTM) is competitive, though larger rivals often benefit from economies of scale. TTM Technologies, for instance, focuses on high-reliability PCBs for defense and aerospace, similar to Eltek, but operates on a significantly larger scale.

Against Sanmina Corporation, which emphasizes end-to-end manufacturing solutions, Eltek's offerings in flexible and multi-layered PCBs are comparable in quality for custom applications. However, Sanmina's integrated service ecosystem, including full assembly, provides a broader offering. Eltek's expertise in high-density interconnect boards for defense and aerospace provides a strong differentiator in demanding conditions. Jabil Inc. and Flex Ltd. are global EMS giants with extensive R&D capabilities and vast networks. While they excel in rapid scaling and global partnerships, Eltek differentiates itself through its focus on direct channels and deep regional expertise, offering a unique value proposition in customized, high-reliability applications. Eltek's long-standing expertise in Israel, for example, could lead to advantages in regulatory compliance for defense applications.

Eltek also faces competition from European companies entering the Israeli market with aggressive, though potentially unsustainable, pricing strategies. Management believes these firms will eventually pivot back to their home markets as European defense budgets increase. Indirect competition comes from emerging technologies like 3D printing for PCBs, which could offer faster prototyping, and integrated solutions from semiconductor manufacturers. Eltek's competitive advantages stem from its proprietary technology in custom PCB designs, strong distribution channels in its target markets, and specialized expertise in high-reliability applications. These strengths allow it to command pricing power in niche segments and foster customer loyalty. However, its smaller scale compared to industry giants can lead to higher operational costs and potential vulnerabilities to supply chain disruptions.

Operational Transformation and Capacity Expansion

Eltek is in the midst of an ambitious accelerated investment program, designed to significantly enhance its production capabilities and meet burgeoning demand. This multi-year initiative, with approximately $10 million invested in 2024 and a similar level anticipated for 2025, aims to scale the company's installed production capacity to support annual revenues between $55 million and $65 million.

A cornerstone of this plan is the installation of new, state-of-the-art equipment. The company successfully launched a new Solder Mask Application department in late 2024, though its initial ramp-up in Q1 2025 faced challenges due to the unavailability of foreign technical experts and regional conflicts, leading to lower production yields. By early May 2025, these operational hurdles were largely resolved, with production stabilizing and efficiency levels returning. The most significant component, a new 40-meter coating line, is expected to arrive by the end of 2025, with qualification and ramp-up slated to begin immediately. This will be followed by the installation of two new plating lines, replacing older equipment, with the first arriving around August 2025 and the second in the first half of 2026. These new lines are anticipated to significantly increase capacity, enhance quality, and facilitate upgrades to advanced technologies without disrupting existing production.

Supporting infrastructure is also being upgraded, including a major enhancement to the cooling system, now providing a 20% surplus capacity for future clean room expansion, and a 40% increase in electrical capacity. To address persistent challenges in recruiting qualified manufacturing personnel, Eltek has submitted a formal request to participate in an Israeli government program to employ foreign workers. If approved, this initiative would enable 7-day-a-week production, substantially boosting manufacturing flexibility and capacity for defense-related products. Furthermore, a company-wide ERP project, initiated in Q1 2025 and expected to span 18 months, aims to streamline internal workflows, optimize processes, and centralize critical organizational knowledge, driving long-term operational efficiency.

Financial Performance and Outlook

Eltek's recent financial performance reflects the impact of its operational transformation and the strong market demand. In Q2 2025, revenues totaled $12.5 million, marking a robust 20% increase compared to Q2 2024. For the first half of 2025, revenues reached $25.3 million, up from $22.2 million in the first half of 2024, indicating early signs of production capacity stabilization and an improved run rate. Gross profit nearly doubled to $3 million in Q2 2025 from $1.6 million in Q2 2024, with the gross margin expanding significantly to 24.1% from 15.6%. This improvement was driven by enhanced operational efficiencies and a more favorable product mix, particularly the higher contribution from rigid-flex PCBs. Operational income also rose to $1.5 million in Q2 2025, up from $0.4 million in Q2 2024. Despite these positive trends, Q2 2025 net income was $0.4 million, or $0.05 per diluted share, compared to $1.4 million, or $0.11 per share, in Q2 2024.

This was primarily due to a one-time financial expense of $1 million resulting from a 9% devaluation of the U.S. dollar against the Israeli shekel. The company has proactively adjusted its pricing model to align with its NIS-denominated cost structure to mitigate future currency shifts. EBITDA for Q2 2025 reached $2 million, a significant increase from $0.8 million in Q2 2024. Cash flow used in operating activities amounted to $2.9 million in Q2 2025, mainly due to an increase in trade receivables and a strategic build-up of inventory to reduce risk amidst the regional conflict. As of June 30, 2025, Eltek maintained a healthy cash position of $11.2 million with no outstanding debt.

Looking forward, management anticipates a significant impact on profitability from incremental revenue, with approximately $0.50 on every additional dollar of sales expected to contribute to gross profit, as fixed costs are largely absorbed. The company targets a gross profit margin of 26% to 29% in the medium to long term (the next two to three years). The industrial segment, which experienced a slowdown in Q3 2024, is expected to recover in 2025. Eltek's Board of Directors has adopted a dividend distribution policy, allowing for annual dividends of up to 25% of net profit, contingent on the company's financial position and cash flow needs.

Risks and Challenges

While Eltek's outlook is positive, several risks warrant investor attention. Geopolitical instability in Israel poses ongoing operational challenges, as evidenced by past delays in technical support and the strategic decision to increase inventory levels. Currency fluctuations, such as the recent devaluation of the U.S. dollar against the Israeli shekel, can impact financial results, though Eltek has adjusted its pricing model to address this. The highly competitive Israeli labor market continues to present recruitment challenges for qualified manufacturing personnel, necessitating reliance on government programs for foreign workers.

Uncertainty surrounding new U.S. tariff policies for products originating from Israel, particularly for defense-related equipment, could also affect Eltek's competitive position, although higher tariffs on products from other exporting countries like Canada could also present an advantage. The successful and timely installation and ramp-up of new production lines, particularly the 40-meter coating line and new plating lines, are critical to achieving the projected revenue capacity and profitability targets. Any further delays could impact the company's growth trajectory.

Conclusion

Eltek Ltd. stands at a pivotal juncture, transforming its operational capabilities to capitalize on robust demand in high-reliability PCB markets. The company's strategic investments in state-of-the-art production technology, coupled with its deep expertise in complex, custom-designed PCBs, form the bedrock of its investment thesis. Despite recent operational hurdles and geopolitical complexities, Eltek's Q2 2025 results demonstrate a clear path toward stabilization and enhanced profitability, driven by strong revenue growth and expanding gross margins.

The successful execution of its accelerated investment plan, particularly the integration of new coating and plating lines, is expected to unlock significant capacity and drive future financial performance. Eltek's focus on critical sectors like defense and medical, where its technological differentiation provides a competitive edge, positions it favorably against larger, more generalized rivals. While labor challenges and geopolitical risks persist, management's proactive strategies to mitigate these factors, alongside a clear vision for operational efficiency and capacity expansion, underscore a compelling narrative for long-term growth. Investors looking for exposure to a specialized, high-tech manufacturer poised for expansion in essential industries may find Eltek's strategic ascent a compelling opportunity.