Company Spotlight - L-3 Communications Holdings (LLL-NYSE) The Best Offense is Defense | | NASDAQ: LLL $107.21 | The Good: Investors aren't bailing from this stock, even in days of panic.
The Bad: Not much of a bargain.
The Beautiful: Earnings are very strong and should remain so for years to come. | P/E: 16.5 | PSR: 0.99 | ROE: 13.2% | Debt/Eq: 0.8 | Div. Yield: 0.90% |
January 29, 2008 - L-3 Communications Holdings (NYSE:LLL) makes security and specialized systems for satellite, avionics, and marine communications. This is a big company with revenue of nearly $14 billion last year, and it's benefitting from the uptrend in defense spending. L-3 is due to report earnings on Thursday and investors are clearly anticipating more good numbers. Earnings estimates keep rising and the stock has been on an impressive upward trajectory, rising from $80 a year ago to $107.21 currently. Even in the recent market tumult, in which major market indices have plunged 10-15%, L-3 is essentially unchanged.
L-3 does most of its business with the US government, particularly the military, but L-3 has used acquisitions to expand its commercial offerings to include products like flight recorders (black boxes), display systems, and wireless telecom gear. L-3 has added to its aircraft repair, overhaul, and technical services as well as airport security systems.
The company was formed in 1997 from the defense operations of Loral Space & Communications. It has grown earnings every year, and the outlook is for 19% growth on average over the next five years. For the year just ended (and schedule to be reported on Thursday0, EPS are expected at $5.92, up 40% from $4.22 last year. The consensus jumps to $6.51 for 2008. The stock price marched upward from early 2003, when it traded as low as $36, to a peak above $88 in early 2006. After the death of its CEO last June, the stock dipped below $70 briefly, but when interim-CEO Michael Strianese was given the post permanently in October the focus shifted right back to business. LLL has hardly flinched in its drive to the triple digits since then. Though it's still not a bargain, its valuation is relatively cheap compared to recent years. LLL is trading at 16.4 times projected earnings, and with a market cap of $13.5 billion it is valued at slightly less than one times sales. Over the past five years, L-3's Price/Sales Ratio has averaged 1.1. The company has been growing aggressively through acquisitions so there's always some choppiness that comes with the territory, but LLL has generally shown an aptitude for integration. The newly permanent CEO has been with L-3 since its inception in 1997, so continuity should not be a problem. Whether investors show confidence in the former-CFO's leadership remains to be seen. Strianese inherited a favorable situation with a strong order backlog, and that position continues to strengthen. The backlog for orders was up to $8.7 billion at the end of 2006, up 25% from $7.0 billion a year earlier. Keep an eye out for this figure on Thursday as a key gauge for how investors will react. L-3 Communications is one beneficiary of increased defense spending. If you believe the U.S.'s commitment will only get larger, then take some time and look at more of these numbers. It's a large cap stock with a $13.5 billion market value. Roughly 40% of the balance sheet is dedicated to debt. The stock is in a solid long-term uptrend, which is attractive to momentum-oriented investors but eliminates bargain hunters from the picture at this price. This company has a lot of business on the books and billions more in the order pipeline, so it's the kind of stock where many investors seek shelter as worries about recession reverberate through the rest of the market. - James Hale |
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