Risk-Reward Balanced at L-3 Communications - Analyst Blog

On Apr 8, 2014, we issued an updated research report on L-3 Communications Holdings, Inc. LLL. L-3 Communications – a leading supplier of a broad range of products and services used on a number of aerospace and defense platforms – exited 2013 on a positive note with top and bottom lines for both the fourth quarter and full year beating the respective Zacks Consensus Estimate.

L-3 saw frequent Department of Defense (DoD) contract inflows last year thanks to its varied business programs. The company secured key contracts from the U.S. Missile Defense Agency to design, manufacture and test Medium Range Ballistic Missile target launch vehicles and support equipment and a contract to develop a next generation transmission system for the U.S. Army's Gemini Transmission program. It also won contracts to provide network operations to support the Phoenix Air to Ground Communications Network Contractor Logistics Support program. These awards will collectively ensure a steady revenue stream  for L-3 amidst budget sequestration.

L-3 Communications, like other defense biggies, is focused on expanding its international footprint in view of budget uncertainties at home. During the fourth quarter 2013, the company expanded its international and commercial business, which partly offset declines in its U.S. national security business. Its international and commercial sales increased 8% year over year in the fourth quarter 2013, and represented about 30% of its consolidated net sales (up from 25% in the year-ago quarter).

Again, the company's impressive balance sheet provides financial flexibility for incremental dividends, ongoing share repurchases and earnings accretive acquisitions. Last year, the company returned $1 billion to shareholders through stock purchases and dividend payments.

Recently, this Zacks Rank #2 (Buy) company hiked the quarterly cash dividend by 9%, boosting further confidence in the stock. Moreover, management expects to make $1 billion of free cash flow and buy back $0.5 billion of shares in 2014.

On the flipside, L-3 Communications generates a large percentage of its revenues from the U.S. DoD, representing 73% of total 2013 sales. With plans for further defense spending cuts ahead, the company's performance is likely to get affected to some extent.

Some other stocks worth considering in the defense sector include Raytheon Co. RTN, Huntington Ingalls Industries, Inc. HII and Northrop Grumman Corp. NOC. While Huntington Ingalls sports a Zacks Rank #1 (Strong Buy), Northrop and Raytheon carry a Zacks Rank #2 (Buy).