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On Jul 18, Zacks Investment Research downgraded Exelis, Inc. (XLS - Snapshot Report) to a Zacks Rank #2 (Buy) from Zacks Rank #1 (Strong Buy).

Why the Downgrade?

Major defense spenders across the globe are trying to tighten their purse and lower defense spending. In addition, the effect of the sequester is causing uncertainty about government spending on defense. This uncertainty could lower the future order flow of the company.

This aerospace and defense company delivered positive earnings surprises in the last 4 quarters with an average beat of 22.54%. Exelis is a leading supplier of Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) related products and systems for its military and commercial customers spread globally.

We notice that defense establishments around the globe are gradually shifting their focus towards network centric warfare from platform centric warfare prevalent earlier. This move – equivalent almost to a revolution in military practices – is fired by evolution of economics, information technology and business processes.

Recent noteworthy contracts from the U.S. Army include the Jul 2013 contract from the U.S. Marine Corps Logistics Command, Albany, Ga. Exelis was selected as one of the prime contractors for the five-year, $854 million Marine Corps Logistics Support Services contracts program. In Jun 2013, the U.S. government asked Exelis to continue to provide information technology operations and maintenance support to the U.S. Army in Southwest and Central Asia. The value of the contact could touch $788 million if all options are exercised.

In addition, the strong backlog of $9.1 billion at the end of the first quarter, encouraging international orders and restructuring of its operations will further boost Exelis’ margins.

The current valuation also makes the shares of Exelis attractive. The forward price/earnings (P/E) multiple of 9.5x is lower than the peer group average of 12.0x, reflecting a discount of 20.8%. The Return on Equity (ROE) of the company is 31.5%, which is higher than the industry average of 17.6%.

Other Stocks to Consider

Besides Exelis, Inc. a few other companies like Astronics Corporation (ATRO - Snapshot Report), HEICO Corporation (HEI - Snapshot Report) and Orbital Sciences Corp. (ORB - Snapshot Report) also carry a favorable Zacks Rank. All these companies presently have a Zacks Rank #1 (Strong Buy).

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