L-3 Communications Holdings Inc. (LLL, Financial), is a contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, Command, Control, Communications (C3) systems, aircraft modernization and sustainment of aircraft, maritime vessels and ground vehicles, and national security systems. The company also provides electronic systems used on military and commercial platforms.
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.
R&D
L-3’s structure now consists of these four business segments: Electronic Systems, C3ISR, Aircraft Modernization and Maintenance, and National Security Solutions.
The company plans to increase its customer database focusing on research and development. “The realigned business segments will enhance L-3’s productivity and agility,” says Michael T. Strianese, L-3’s chairman, president, and chief executive officer. “This new structure will improve our competitive position and generate cost savings, as well as greater technology and sales synergies, through more focused collaboration across the company. This strategic move increases L-3’s ability to deliver innovative and cost-effective solutions to our customers and enhance shareholder value.”
Additionally, L-3 obtained an incentive offered by the authority for $14 million of research and development government tax credit that will boost its profit in the near future.
Dividend & Share Repurchases
Looking at the financials, the company has a strong balance sheet: good cash that allows the company to retain its dividend payout of $0.55 per share, reflecting a dividend yield of 2.18%, higher than the industry average of 1.80%. Furthermore, last year the board of directors has also authorized a new share repurchase program allowing the company to repurchase up to an additional $1.5 billion of the company’s common stock through June 30, 2015. It repurchased 4.8 million shares for $404 million from Jan 1, 2013 to Sep 27, 2013.
Analyst Recommendation
The firm is currently Zacks Rank # 2 – Buy, and it also has a longer-term recommendation of “Neutral”. For investors looking for a better Zacks Rank, Raytheon Co. (RTN, Financial) is a better option.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 13.9x, trading at a discount compared to an average of 19.1x for the industry. To use another metric, its price-to-book ratio of 1.7x indicates a discount versus the industry average of 2.5x and the price-to-sales ratio of 0.9x is below the industry average of 1.15x.
Earnings per share (EPS) decreased in the most recent quarter compared to the same quarter a year ago (from $2.25 to $2.17). In the next graph we can see that it has demonstrated an interesting positive trend in the last five years and we include the stock price because EPS often lead the stock price movement. The last year, the stock´s share price has jumped by 45.34%, exceeding the S&P 500 performance.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a clear sign of weakness within the company.
Let´s compare the current ratio with the peer group in the next table:
| Ticker | Company Name | ROE (%) |
| LLL | L-3 Communications Holdings | 12.92 |
| RTN | Raytheon Co. | 18.09 |
| ARTX | Arotech Corporation | -7.85 |
The company has a current ratio of 12.92% which is higher than the one registered by Raytheon and Arotech Corporation (ARTX, Financial).
Final Comment
As outlined in this article, we see with good eyes L-3´s new structure. Although the firm´s EPS as well as ROE’s decreased in the most recent quarter, I feel bullish about this company’s future profitability due to the potential of the new business structure.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in Q4 2013. Gurus like Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio), Richard Snow (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have also invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
