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Analyst Blog

On Dec 6, 2013, we maintained our Neutral recommendation on L-3 Communications Holdings Inc. (LLL - Analyst Report). The company holds a Zacks Rank #3 (Hold).

Why the Reiteration?

L-3 Communications Holdings operates through its wholly owned subsidiary, L-3 Communications Corporation. L-3 Communications is a leading supplier of a broad range of products and services used on a number of aerospace and defense platforms. In addition, the company is a prime system contractor for aircraft modernization and maintenance; simulation and training; and government systems support services.

Recently, the company posted mixed third quarter 2013 results with earnings topping the Zacks Consensus Estimate and revenues missing it. Sales declined year over year at all the segments.

However, international sales were up 2% in the third quarter that helped in partially offsetting declines from sequestration and the Afghanistan drawdown. The C3ISR programs are a critical component in accelerating the company’s future growth trajectory. The fiscal 2014 budget calls for continued funding of the C3ISR programs and with growing international interest in the SPYDR ISR and maritime patrol programs, we believe L-3 is poised to benefit significantly in the future. Hence, a steady inflow of international orders, especially from the emerging Asian and Gulf countries, will help L-3 to combat the domestic market challenges.

L-3’s constant efforts to upgrade technology will strengthen its profitable business segments like Electronic Systems and Platform & Logistics Solutions. Both these divisions have won key orders during the third quarter reflecting the success of L-3’s strategy to expand international and commercial sales. Its plan to boost its research and development as well as technological capabilities will attract potential customers. Moreover, incentives offered by the government like the $14 million research and development tax credit will likely lift L-3’s net profit in the upcoming quarters.

All said, the sequestration will to some extent dry up orders for this defense major.

Other Stocks to Consider

Some other stocks worth considering in the defense sector include Raytheon Co. (RTN - Analyst Report), Northrop Grumman Corp. (NOC - Analyst Report) and The Boeing Company (BA - Analyst Report). While Raytheon sports a Zacks Rank #1 (Strong Buy), Northrop and Boeing carry a Zacks Rank #2 (Buy).

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