"Elbit's share price does not reflect the combination between Elbit's internal growth deriving from its technological advantages and the possibility of further growth through acquisitions," writes the investment bank.
The bank projects that Elbit Systems, which own 42 percent of Tadiran Communications (TASE: TDCM), may aspire to reach a 100 percent shareholding in order to preclude conflicts of interest between the two warfare electronics companies, to eliminate redundancies, and to exploit their synergies.
In 2006 Elbit Systems should demonstrate dual-digit organic growth and an additional spur from assimilating Elisra, which won new projects in the first quarter of 2006. Absorbing Elisra only slightly hurt Elbit Systems' margins, says the bank, because of improvements at Elisra itself and the continuing improvement at Elbit Systems.
If Elbit Systems does completely take over Tadiran Communications, it will achieve advantages of size, and lift its gross and operating margins, says the investment bank. It would cost Elbit Systems about $270 million, assuming a 10 percent premium over Tadiran's market valuation.
The analyst doesn't see the takeover being carried out before 2007. He notes that while gross margins shouldn't be hurt, net profit will because of higher financing costs.
Elbit Systems is a defensive stock (one hurt less when the market dips, but that responds slowly when the market turns bullish), says the analyst.
He also touts Elbit Systems as a potential candidate to buy chunks of the Israel Military Industries when it is privatized.
Clal Finance Batucha projects that Elbit Systems will end 2006 with 27 percent revenue growth to $1.36 billion, and a profit of $58.1 million. Its investment recommendation for Elbit Systems is Buy and 12-month price target is $31, which is 17 percent above its present share price.