Elbit Discount to S&P Defense Is Buy to Leumi

Elbit Systems Ltd. (ESLT)’s biggest discount to the Standard & Poor’s 500 aerospace and defense index in five months is a sign to Bank Leumi Le-Israel Ltd. (LUMI) that investors should buy shares of the Israeli security company.

Israel’s biggest non-government defense technology developer dropped 2.7 percent in New York yesterday, sending valuations to 8.02 times estimated earnings, while the average for members of the S&P defense index is 13.4. The 40 percent discount was the biggest since Sept. 16. The Israel-US 25 Index of the largest U.S.- traded Israeli stocks added 0.1 percent. Elbit Systems rose 0.4 percent at 10:11 a.m. in Tel Aviv as the country’s benchmark stock index fell 0.3 percent.

Haifa, Israel-based Elbit is lagging behind peers after saying on Feb. 10 that fourth-quarter net income will be reduced by as much as $65 million as a contract expired and on concern sales will fall should the U.S. government cut $487 billion from the 10-year defense budget plan. The stock has slipped 4.8 percent in New York over the past month, while the S&P Aerospace and Defense Index gained 5.2 percent.

“There is no reason why Elbit should suffer more than its peer group,” Ella Fried, an analyst at Bank Leumi, Israel’s largest lender by assets, said by phone from Tel Aviv yesterday. “The valuations don’t make sense. Once we see how much cuts there will be in the U.S. budget, Elbit may be seen as a more defensive option after the decline.”

Fried recommends investors buy shares of Elbit and sell stock of companies on the S&P Aerospace and Defense index. Companies including Chicago-based airplane maker Boeing Co. and Northrop Grumman Corp. (NOC), the Falls Church, Virginia-based maker of the U.S. military’s Global Hawk drone, make up the 12-member index.

The Israel-US 25 Index has gained 8.8 percent this year, outperforming the TA-25 Index (TA-25)’s 2.8 percent climb and the S&P 500 Index’s 7.5 percent increase.

Teva Pharmaceutical Industries Ltd. (TEVA), the world’s biggest maker of generic drugs, is leading the 2012 advance after subduing concern that it would struggle to find new revenue by replacing its chief executive officer. The Petach Tikva, Israel- based company reports fourth-quarter earnings tomorrow.

U.S. Defense Secretary Leon Panetta presented an outline on Jan. 26 for $613 billion in spending for the fiscal 2013 year. The proposal is part of an effort to cut $487 billion from $5.62 trillion in defense spending that had been planned for the 10 years from 2012 to 2021.

Israel’s Defense Ministry instructed Elbit in December to halt sales of its airborne intelligence gathering system to Turkey. The company’s share of the contract is about $90 million and it may receive some compensation from the government, according to IBI-Israel Brokerage & Investments Ltd.

“Since this is an isolated profit warning that has been given in light of a specific event, we think the declines will be brief,” Guil Bashan, an analyst at IBI in Tel Aviv who rates Elbit a “buy,” wrote in an e-mailed report on Feb. 12. “The declines represent an opportunity to increase positions.”

Elbit is scheduled to report fourth-quarter earnings on March 15. Its Tel Aviv shares rose to 143.2 shekels, or the equivalent of $38.36.

The company, whose products include unmanned aerial vehicles and remote weapon systems, said on Nov. 16 that third- quarter net income dropped to $36.5 million, from $45.3 million in the same period in 2010.

Israel, whose population of 7.8 million is similar in size to Switzerland’s, has about 60 companies traded on the Nasdaq Stock Market, the most of any country outside the U.S. after China. The nation is also home to more startup companies per capita than the U.S.