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Goldman Sachs has upgraded L-3 Communications Holdings, Inc. (NYSE: LLL) to Buy from Neutral on potential margin upside and exposure to nascent defense recovery.
Analyst Noah Poponak said the defense contractor has a "collection of assets" that should boost margins from the current levels.
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The company also hired former Lockheed Martin Corporation (NYSE: LMT) executive Chris Kubasik, who was instrumental in improving LMT margins substantially during his tenure. The analyst noted that L-3 beat consensus EPS by 35 percent and segment EBIT by 19 percent in the first full quarter of Kubasik as COO.
The analyst said the company only raised its full-year guidance from operations by $0.02.
"We therefore conclude that the bar is still low, both in terms of investor expectations for LLL and the company's ability to beat and raise its outlook throughout the remainder of the year," Poponak wrote in a note.
Meanwhile, Poponak believes that the U.S. Defense budget is at a "trough" and sees scope for further growth for several years.
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Expectations And Raised Estimates
While noting that "LLL is one of the five large-cap Defense primes and has substantial exposure to this end market recovery," the analyst expects 2016 to be L-3's final year of revenue decline. He sees the company accelerating organic revenue growth in 2017.
Poponak also raised his 2016/2017/2018E EPS to $8.25/$9.33/$11.12 from $7.71/$8.64/$9.80 to reflect higher segment margins. Additionally, the analyst increased price target to $156 from $138.
"Our 2016–2018E EPS estimates are now 8 percent, 11 percent, and 19 percent above consensus; while only modeling that the 2017 segment margin gets back to the 2011 actual segment margin," Poponak continued.
The analyst noted the current consensus estimates are associated with the lower margins due to company's execution missteps.
"We see a scenario in which LLL experiences both positive consensus estimate revisions and expansion in its multiple over the course of the remainder of the year," Poponak added.
According to TipRanks, Poponak has a success rate of 68 percent with an average return per recommendation of +15.2 percent. The analyst is ranked 254 out of 3,908 analysts.
Shares of L-3 closed Friday's regular trading at $131.49. In the pre-market, shares were up 2.26 percent to $134.50.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.