L-3 Communications Holdings Inc.
) announced that its Security and Detection Systems division has
been awarded an indefinite-delivery/indefinite-quantity or ID/IQ
contract by the Transportation Security Administration or TSA to
supply medium-speed explosives detection systems. The five-year
acquisition program has a revenue potential of $549.6 million for
(EGL): ETF Research Reports
FLIR SYSTEMS (FLIR): Free Stock Analysis Report
L-3 COMM HLDGS (LLL): Free Stock Analysis
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Under this contract, L-3 will supply TSA with eXaminer 3DX and
eXaminer 3DX-ES systems for use in checked bag screening at the
nation's airports. More than 640 of these systems are currently in
use by TSA.
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; ISR collection platforms; simulation and training; and
government systems support services.
Recently, in July 2012, L-3 Communications completed the spin-off
of 100% of a new, independent, publicly traded government services
Engility Holdings Inc.
) - to L-3 shareholders. We believe that L-3 Communications has
ample opportunity for growth and profit expansion after the
favorable conclusion to the spin-off of its Government Services
businesses. The company has retained its profitable Cyber,
Intelligence, and Security Solutions business. The spin-off also
removes a lot of uncertainty with respect to revenue and takes away
some of the low margin businesses of the company. Over the longer
run, we view the company as one of the best-positioned pure defense
players based on its non-platform focus, broad diversification of
programs and its focus on shareholder value.
L-3 Communications remains a key player within the defense segment
and mainly competes with
FLIR Systems Inc.
). We believe it is one of the best-positioned pure defense plays
by virtue of its non-platform focus and a broad diversification of
L-3 Communications is strengthening itself by focusing on
improvement of operational efficiencies, investing in research and
development to provide affordable solutions, acquiring businesses
that will add new capabilities, and expanding product lines and
divesting businesses. Moreover, its broad diversification of
programs would provide growth momentum. Going forward, we expect
future growth to come from the company's strong presence in the
current focus areas of C3ISR equipment; precision-guided weapons;
unmanned aerial vehicles ("UAVs"); and other electro-mechanical
Over the longer run, however, we maintain our Underperform
recommendation on the stock. The stock is currently trading at a
discount to both the peer group and the S&P 500 based on
forward earnings estimates. The discounted valuation is mainly
because of the company's non-platform focus, resulting in shorter
cycle contracts, and its prominent position as
sub-contractor/supplier to other defense primes. This also results
in contracts expiring faster than its peers, bringing in the need
of new ones to replace them. However, with domestic contracts
drying up fast, the company's growth will be influenced by its
ability to capture new contracts going forward. In the near term,
the company is witnessing lower sales while higher competition has
resulted in margin headwinds through re-competitions of existing
businesses. Thus, we would advise investors to exit from the
company for now until the ongoing macro headwinds abate. L-3
Communications currently retains a Zacks #4 Rank, which translates
into a short-term Strong Sell rating.