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Summary

  • L-3 earnings estimates have been increased from when I sold it in February.
  • The dividend is low for now, but can be raised significantly.
  • It looks like the stock is building a base at these levels to bounce higher.

The last time I wrote about L-3 Communications Holdings, Inc. (NYSE:LLL) I stated, "…the stock has an expectation of contraction in future earnings growth…In fact; with my quarterly realignment coming soon I am going to think about swapping out of the stock." During my quarterly portfolio change-out in mid-February I decided to sell L-3 out of the portfolio and replace it with Rayonier Inc. (NYSE:RYN) because I believe Rayonier has a lot of value to unlock through its spinoff of the performance fibers business. L-3 Communications is a prime contractor in command, control, communications, intelligence, surveillance, and reconnaissance systems, aircraft modernization and maintenance, and government services.

On January 30, 2014, the company reported fourth quarter earnings of $2.17 per share, which beat the consensus of analyst estimates by $0.19. In the past year the company's stock is up 43.51% excluding dividends (up 45.8% including dividends), and is beating the S&P 500, which has gained 19.23% 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 show why I sold L-3 out of the industrials sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 13.63, 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 13.37 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $8.71 per share and I'd consider the stock inexpensive until about $131. The 1-year PEG ratio (3.6), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 3.79%. 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%

19Mar14

116.43

13.63

13.37

8.71

131

3.60

3.79

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 2.06% with a payout ratio of 28% of trailing 12-month earnings while sporting return on assets, equity and investment values of 5.6%, 13.6% and 9.8%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.06% 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 11 years at a 5-year dividend growth rate of 13.8%. 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

25

5.6

14.0

10.6

08Nov13

2.17

25

5.6

14.0

10.6

19Mar14

2.06

28

5.6

13.6

9.8

Technicals

(click to enlarge)

Looking first at the relative strength index chart (RSI) at the top, I see the stock muddling around in middle-ground territory with a value of 58.31. I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is below the red line with the divergence bars flattening out in height, indicating the bearish pattern is getting tired.

Conclusion

I sold L-3 for a solid 25.56% gain or 36.18% on an annualized basis. These are two different types of companies with Rayonier operating more on the timberland management side and L-3 operating on the aerospace side of things. Fundamentally I believe L-3 to be inexpensively valued based on future earnings now. At the time I sold it the stock the 2015 earnings estimates were less than the trailing twelve month earnings and I felt that it could drop in price dramatically based on those earnings because they are expected to contract in the next year; but now those estimates have been raised and I would consider buying the stock again. Financially I'm gained quite a bit of dividend. On a technical basis L-3 seems poised for a bullish run. It is quite possible that after the Rayonier spinoff I will look at this stock again to replace Rayonier in the dividend portfolio. Because I swapped out L-3 for Rayonier in my dividend portfolio it is only fair that I provide an update from the swap-out date. From February 25, 2014, Rayonier is down 3.25% while L-3 is up 0.11%. The trade has not worked for the past week as interest rates have been rising with the FOMC speaking about raising the Fed-funds rates within the next six or so months. Every utility and REIT stock such as Rayonier will get hard, but I believe in Rayonier because of the analysis I've performed previously.

(click to enlarge)

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. 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: After Selling Dividend Paying L-3 Communications A Month Ago I'm Considering Buying It Again