On Feb 11, we reiterated our Neutral recommendation on
L-3 Communications Holdings Inc.
) based on the company's fourth quarter results and a fair
guidance for 2013. However, loss of key contracts, a backlog
skewed toward fixed price contracts and possibilities of cuts in
future defense budgets remain areas of concern.
Why the Reiteration?
L-3 Communications Holdings operates through its wholly owned
subsidiary, L-3 Communications Corporation. L-3 Communications is
a leading supplier of a broad range of products and services used
on a number of aerospace and defense platforms. In addition, the
company is a prime system contractor for aircraft modernization
and maintenance; simulation and training; and government systems
We believe that L-3 Communications over the longer run is one of
the best-positioned pure defense players based on its
non-platform focus, prominent position as sub-contractor/supplier
to other defense primes, broad diversification of programs and
strong order bookings. Its strong balance sheet also provides
financial flexibility to increase its dividend, indulge in share
repurchases and earnings accretive acquisitions.
We believe future growth will come from its strong presence in
the areas it currently focuses on. These include command,
control, communications, intelligence, surveillance and
reconnaissance (C3ISR) equipment; precision-guided weapons;
unmanned aerial vehicles (UAVs); and other electro-mechanical
robotic capabilities, networked information technologies, special
operations forces, platform upgrades and counterterrorism
On the flip side, however, a substantial portion of L-3
Communications' business is generated within the U.S, with
government and commercial sales accounting for more than 80% of
total sales. Budget deficits and political uncertainty loom on
future defense budgets with high chances of shrinkage.
Moreover, more than half of L-3 Communications' sales come from
fixed priced contracts. Consequently, the company will only be
able to make a profit if costs stay within the set limits. Given
these headwinds, we maintain our Neutral stance on L-3
Communications. The company now has a Zacks Rank #3 (Hold). For
fiscal 2013 and 2014, we have an earnings ESP (Read: Zacks
Earnings ESP: A Better Method) of +0.5% and +0.6%, respectively.
Others Stocks to Consider
In the aerospace and defense industry we presently prefer the
Zacks Rank #1 (Strong Buy) stock,
European Aeronautic Defence and Space Company
), as well as the Zacks Rank #2 (Buy) stocks
Huntington Ingalls Industries Inc.
FLIR Systems, Inc.
(EADSY): ETF Research Reports
FLIR SYSTEMS (FLIR): Free Stock Analysis
HUNTINGTON INGL (HII): Free Stock Analysis
L-3 COMM HLDGS (LLL): Free Stock Analysis
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