Despite Strong Stock Performance Year-To-Date, Deutsche Still Says L-3 Trading At A Discount

Deutsche Bank said shares of L-3 Communications Holdings, Inc. LLL are trading at a discount to its large-cap peers despite its 23 percent upside year-to-date.

"Despite the move, we still see a 15-20% discount to other large cap defense names on FCF yield which the company could close further (through likely not eclipse)," analyst Myles Walton wrote in a note.

Further, the analyst noted that compared to other defense names, L-3 seems to have a bit more margin expansion opportunity as the company has laid out operating margin targets ahead of 2016 performance. Among the segments, Electronics is said to be having the potential biggest impact at the company level given its size.

"With margins for that segment targeted for 13-14%, vs. the '16 guidance midpoint of 12.1%, there is 2-7% upside of earnings in that segment alone. M&A is another differentiator for LLL given it could add another 2%+ to our EPS CAGR," Walton highlighted.

On the macro front, the uptick in defense spending is a tailwind for the company resulting in visible upside to top-line and bottom-line expectations. Last month, the company raised its 2016 revenue outlook to $10.15-$10.25 billion from $9.95-$10.15 billion and EPS view to $7.65-$7.85 from $7.55-$7.75. Walton sees 2016 EPS of $7.81 on revenue of $10.197 billion.

Walton reiterated his Buy rating and $160 price target.