In this article, let's take a look at L-3 Communications Holdings Inc. (LLL, Financial), a $11.02 billion market cap company that is a provider of defense intelligence, surveillance and reconnaissance systems; secure communications systems; aircraft modernization, training and government services; and other defense, intelligence and security products. So, let´s try to explain to investors the reasons this is an apparently appealing investment.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 17.3x, trading at a discount compared to an average of 21.4x for the industry. To use another metric, its price-to-book ratio of 1.9x indicates a discount versus the industry average of 2.64x and the price-to-sales ratio of 1.0x is below the industry average of 1.15x.
Earnings
Earnings per share (EPS) increased in the most recent quarter compared to the same quarter a year ago (from $2.36 to $1.87). During the past fiscal year, the company reported lower earnings of $7.57 versus $8.07 in the previous year. This year, Wall Street expects an improvement in earnings ($7.62 versus $7.57).
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.
Net income
The net income growth from the same quarter one year ago has exceeded the S&P 500 index. It increased by 20.1% when compared to the same quarter one year prior, going from $169.00 million to $203.00 million.
Return on equity
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 | 11.40 |
| RTN | Raytheon Co. | 20.22 |
| ARTX | Arotech Corporation | 4.87 |
| Â | Industry Median | 11.48 |
The company has a current ratio of 11.40% which is higher than the one registered by Arotech Corporation (ARTX, Financial). It is very important to analyze the ROE over time. During the past 13 years, L-3 Communications Holdings Inc's highest ROE was 15.84%, the lowest was 10.43% and the median was 13.06%.
| Year | ROE (%) |
| 2005 | 12.27 |
| 2006 | 10.74 |
| 2007 | 13.39 |
| 2008 | 15.84 |
| 2009 | 14.5 |
| 2010 | 14.33 |
| 2011 | 14.27 |
| 2012 | 12.97 |
| 2013 | 13.14 |
| 2014 | 11.79 |
Dividend and share repurchases
The company has a strong balance sheet: good cash that allows the company to increase dividends to $0.65 per share. The trailing annual dividend yield is 1.9%, which is higher than the industry average of 1.80%. Furthermore, last year the board of directors approved the repurchase of an additional $1.5 billion of its common stock through second-quarter 2017.
Final comment
The company currently has a Zacks Rank # 3 – Hold; but I feel bullish about this company. So, I would recommend investors to consider adding the stock for their long-term portfolios, as the firm is increasing their share buybacks at a regular and steady pace.
Hedge fund guru Jim Simons (Trades, Portfolio) has also been active in the company in the last quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
