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The last time I wrote about L-3 Communications Holdings, Inc. (LLL) I bought some shares in it but expected the stock to trade downwards in that near-term, stating, "…$89.98 to act as support..." and that I would buy more when the yield got higher. The stock came to a low of $90.33 on 30Aug13 and then shot up; since my last article it actually shot up 11.29% versus the 6.92% the S&P500 (SPY) posted. L-3 Communications is a prime contractor in command, control, communications, intelligence, surveillance, and reconnaissance systems, aircraft modernization and maintenance, and government services. On October 29, 2013, the company reported third-quarter earnings of $2.23 per share, which beat the consensus of analysts' estimates by $0.28. In the past year, the company's stock is up 33.82% excluding dividends (up 36.46% including dividends), and is beating the S&P 500 , which has gained 25.19% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the industrial goods sector of my dividend growth portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 11.73, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 12.39 is currently inexpensively priced for the future in terms of the right here, right now. The forward P/E value that is higher than the trailing twelve month P/E value tells us the story of earnings contraction in the next year. Next year's estimated earnings are $8.19 per share while the trailing twelve month earnings per share were $8.65. Next year's estimated earnings are $8.19 per share and I'd consider the stock inexpensive until about $123. Below is a comparison table of the fundamentals metrics for the company from the last time I wrote the article to now.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

18Aug13

91.20

10.86

11.2

8.15

122

5.93

1.83

08Nov13

101.5

11.73

12.39

8.19

123

N/A

-1.53%

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.17% with a payout ratio of 25% of trailing 12-month earnings while sporting return on assets, equity and investment values of 5.6%, 14% and 10.6%, respectively, which are all respectable values but nothing to go writing home about. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.17% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past ten years at a 5-year dividend growth rate of 15.3%. Below is a comparison table of the financials metrics for the company from the last time I wrote the article to now.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

18Aug13

2.41

24.7

5.6

14

10.6

08Nov13

2.17

25

5.6

14

10.6

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock in overbought territory with a value of 70.65. To look for moment, I will look at the moving average convergence-divergence [MACD] chart next and see that the black line is above the red line but flat-lining with the divergence bars decreasing in height to the downside, indicating the stock has downward momentum. As for the stock price itself ($101.50), I'm looking at $103.73 to act as resistance and $97.61 to act as support for a risk/reward ratio, which plays out to be -3.83% to 2.2%.

Recent News

  1. On 29Oct13 L-3 reported third quarter earnings of $2.23 on $3 billion in revenue versus expectations of $1.95 and $3.07 billion in revenue.
  2. The company declared a quarterly dividend of $0.55 per share with an ex-date of 14Nov13 and pay date of 16Dec13.

Conclusion

There is no doubt in my mind that with the debt debacle kicked down the road to January 2014 that defense sector names are certainly at the forefront again for budget cuts and is a good explanation as to why next year's earnings estimates are lower than the trailing twelve month earnings. This is not a trend I like to see, I always like to see future earnings at a greater value than trailing earnings. The company is inexpensively valued based on future earnings but extremely expensive on future growth because there is actual earnings contraction expected. Financially, the dividend payout ratio is very low based on trailing 12-month earnings. The technical situation of how the stock is currently trading is telling me we might be seeing some downward pressure in the immediate future. The dividend has some major room to grow, but the stock has an expectation of contraction in future earnings growth, has bearish technical signals written all over it, and is extremely expensive on growth prospects. It is for these reasons I will stay away from the stock for now. In fact, with my quarterly realignment coming soon I am going to think about swapping out of the stock.

Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing.

Source: Earnings Contraction Coming For L-3 Communications, But Dividend Can Be Raised Significantly