Get Defensive With Elbit Systems

In fiscal 2007, Elbit earned $1.81 on revenues of $1.98 billion; for 2008 I estimate that ESLT will earn between $3.20 and $3.30 on revenues of about $2.64 billion (plus or minus $10 million). This would conservatively equate to a year-over-year EPS growth of about 62%. For 2009 and beyond, that growth rate should contract to about 15% to 20%, which still would put 2009 EPS at a range of $3.68 to $3.96.

The balance sheet is in good condition, with the company holding $270 million in cash and equivalents vs. owing $383 million in long-term debt as of the end of the most recent quarter. However, cash flow from operations plus the proceeds of its recent sale of a minority stake in MediGuide to St. Jude Medical (STJ - commentary - Cramer's Take) will greatly improve its financial condition. Under the deal, St. Jude Medical will pay Elbit $138 million in December 2008, $111 million in November 2009 and the remaining $34 million due in April 2010. St. Jude Medical will also assume liabilities worth about $17 million.

The chart below shows that Elbit has recently broken up through its 50-day moving average. The 52-week high for Elbit was $64.20, and the 52-week low was $35.60 during the recent global market selloff. At Friday's close, Elbit stood at $47.73.

When deriving a price target for Elbit, I built in three scenarios:

Low case: $59.00 -- This outcome assumes a price multiple of 16 with EPS at the low end of my estimated range.

Best case: $79.00 -- This outcome assumes a price multiple of 20 with EPS at the upper end of my estimated range.

Base case: $69.00 -- This uses a price multiple of 18 and the midpoint of my estimated EPS range.

Given the recent military action in Gaza, I believe that the Israeli Defense Forces will be opening up a greater budget to Elbit and other defense contractors. Therefore, on a probability-weighted basis, the base and best cases are more likely than the low case. No matter how you weight the outcomes, Elbit is destined to overtake its 200-day moving average and 52-week high. Even at my low case, the stock price appreciation is nearly 24%.

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Know What You Own: Other stocks in the aerospace/defense sector include General Dynamics (GD - commentary - Cramer's Take), Northrop Gruman (NOC - commentary - Cramer's Take), Lockheed Martin (LMT - commentary - Cramer's Take), Honeywell (HON - commentary - Cramer's Take) and Rockwell Collins (COL - commentary - Cramer's Take). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

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At the time of publication, Rothbort was long ELST, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.