L-3 Quarterly Results Improve

L-3 Communications Reports Improved Q1’09 Results

L-3 Communications (LLL - Analyst Report) announced results for its 1st quarter of 2009. LLL reported stable 1st quarter 2009 results with sales up 3.7% year-over-year, net income up 5.3% and fully-diluted EPS up 9.9%.

The U.S. Department of Defense accounted for 74% of the company’s total revenue in 2008.

Net income for the reported quarter increased 4.8% to $197 million or $1.66 per basic and diluted share, compared to $188 million or $1.51 per diluted share ($1.53 basic) recorded in the prior-year quarter. Net sales increased 3.7% to $3.6 billion compared to $3.5 billion in the year-ago quarter. The growth came through primarily from the C3ISR segment, and in the Specialized Products segment.

These increases were partially offset by a decrease in the Government Services and AM&M segments driven primarily by lower linguist services and lower volume for the U.S. Air Force Contract Field Teams (CFT) contract. The increase in net sales from acquired businesses net of divestitures was $77 million, or 2%. In the reported quarter, operating income increased by 2% compared to the year-ago quarter.

The ongoing trend of strategic earnings accretive acquisitions continues, although notably for smaller ticket transactions.

Outlook: L-3 Communications announced that for fiscal 2009 it expects net sales in the range of $15.5 billion to $15.7 billion compared to previous range of $15.5 to $15.7 billion, earnings per share in the range of $7.17 to $7.32 compared to previous range of $7.12 to $7.32.

The company’s LLL’s free cash flow is expected to be at least $1.2 billion for the full-year 2009.

Funded backlog was $11.7 billion at March 27, 2009, with a book-to-bill ratio of 1.04 times for the 1st quarter of 2009.

We continue to view LLL as one of the best-positioned pure defense plays by virtue of its non-platform focus, broad diversification of programs, and exposure to both the investment account and expanding order booking in the Specialized Products category. Furthermore, L-3 is well positioned to become a significant market leader in providing technology for rail security, which could prove to be a bigger global market than airport security, given the attacks in Europe.

The company is also growing through frequent earnings accretive acquisitions. Our bullish outlook for the company and its shareholders is supported by LLL’s record order backlog, strong performance mainly in the C3ISR and Specialized Products segments, disposal of non-core businesses, the GLS subcontract, and strong operating results and robust cash flow; partially offset by divestitures, higher pension funding and declining Linguist and CFT revenues.

We also expect that L-3’s ongoing share repurchase program will be accretive to earnings over the near-term.

Going forward, we expect these positive trends to continue throughout 2009 due to an impressive product portfolio, earnings growth through organic means and accretive acquisitions, as well as strong cash flow generation.

Over the past twelve months, LLL traded within a wide range of 7.7x to 15.3x then current-year 2009 earnings estimates. The range widened mainly since September 2008 when LLL tumbled, overcome by the strong bearish sentiments prevailing in the overall market.

The stock currently trades at 10.4x our 2009 EPS estimate and 9.0x our 2010 EPS estimate, or in the lower-end of the range of its industry peers. Meanwhile, relative price to sales and cash flow multiples indicate that LLL trades at the lower-end of the range of its defense industry peers. Accordingly, with a bullish outlook, strong earnings growth expectations, an ongoing share repurchase program, and a predominant discount valuation, we reiterate our BUY recommendation on LLL, with a six-month target price of $87.50, or 11.8x our current-year 2009 EPS estimate and 10.1x our forward-year 2010 estimate.

Price appreciation to our near-term valuation target -- combined with the recently increased $0.35 per share quarterly cash dividend, which we consider easily sustainable and secure based upon low projected payouts -- represents an annualized total return potential of 28.9%.

Headquartered in New York City, L-3 Communications is a leading supplier of a broad range of products and services used in a number of aerospace and defense platforms. The company supplies subsystems on many platforms that are used for secure communication networks; mobile satellite communications; information security systems; shipboard communications; naval power systems; fuses and safety & arming devices for missiles and munitions; microwave assemblies for radars and missiles; telemetry and instrumentation; and airport security systems. In addition, the company is a prime system contractor for aircraft modernization and maintenance; Intelligence, Surveillance & Reconnaissance (ISR) collection platforms; simulation and training; and government systems support services.