L-3 Communications: Playing Defense

L-3 Communications Holdings (NYSE:LLL) makes security and specialized systems for satellite, avionics, and marine communications. This is a very big company, on track for revenue of $12.2 billion this year, and it's benefiting from the uptrend in defense spending.

The stock is little changed over the past year, though, and the death of its CEO in June created uncertainty ranging from worries about leadership to takeover speculation. The company ended that uncertainty earlier this week when it announced that interim-CEO Michael Strianese will takeover the head job permanently. Now the market focus can turn back to business, and the outlook is rather encouraging.

L-3 does most of its business with the US government, particularly the military, but L-3 has used acquisitions to expand its commercial offerings to include products like flight recorders (black boxes), display systems, and wireless telecom gear. L-3 has added to its aircraft repair, overhaul, and technical services as well as airport security systems.

The company was formed in 1997 from the defense operations of Loral Space & Communications. It has grown earnings every year, and the outlook is for 12% growth on average over the next five years. This year EPS are expected at $4.21 (including charges related to litigation and stock option grants), with the consensus at $5.67 next year. The company also acquired Titan Corp. last year for about $2 billion, bolstering its position among leaders among defense contractors.

The stock priced marched upward from early 2003, when it traded as low as $36, to an all-time high above $88 earlier this year. Now it's fetching $76.82. While that hardly sounds like a bargain, its valuation is relatively cheap compared to recent years. LLL is trading at 13.5 times next year's projected earnings, and with a market cap of $9.45 billion it is valued at just 0.84 of sales. Over the past five years, L-3's Price/Sales Ratio has averaged 1.1.

The company has been growing aggressively through acquisitions, so there's always some choppiness that comes with that territory but LLL has generally shown an aptitude for integration. The newly permanent CEO has been with L-3 since its inception in 1997, so continuity should not be a problem. Whether investors show confidence in the former CFO's leadership remains to be seen.

Strianese inherited a favorable situation, though. The backlog for orders stood at $7.9 billion at the end of last quarter, up from $7.0 billion a year ago. L-3 is due to report third quarter results on Thursday, and the consensus is for EPS of $1.27 on revenue of $1.11 billion. The order backlog will be important for investors, too, as will its strategy with the new CEO now in place.

L-3 Communications is one beneficiary of increased defense spending. If you believe the U.S.'s commitment will only get larger, then take some time and look at more of these numbers. It's a large cap stock with an $9.4 billion market cap. Almost half of the balance sheet is dedicated to debt. The stock has gone up and down but mostly sideways for the past year. There are some uncertainties that have held it back, but this company has a lot of business on the books and billions more in the order pipeline.

Disclosure: Author has no position in LLL