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L-3's Business Moves Impress, Afghanistan Drawdown to Hurt
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We have updated a research report on L-3 Communications Holdings, Inc. on Jun 14, 2016. The company’s endeavor in transforming its business portfolio to defense electronics, communications and ISR markets is partly being offset by its over dependence on government orders and budget volatility in the U.S.
L-3 Communications is gradually transforming its business portfolio to bring more focus to defense electronics, communications and ISR markets where it has leading positions.
To that effect, the company completed the sale of its National Security Solutions (NSS) division to CACI International (CACI - Free Report) for $550 million in cash earlier this year. It had also offloaded Klein Associates, a small side scan sonar business, earlier. Late last year, L-3 Communications acquired a Nashville-based company − ForceX, Inc. − that specializes in ISR mission-management software and geospatial application technology. The acquired entity, renamed L-3 ForceX, was merged with L-3’s Integrated Sensor Systems (“ISS”) unit within the Electronic Systems business segment. It expects the acquired business to add $30 million to sales in 2016.
International Focus
A steady flow of foreign military sales contracts will help counter the volatile defense budget impact. L-3 Communications’ international and commercial sales represented about 30.3% of its consolidated net sales in 2015 compared with 29% in 2014. The company has expanded its international sales by more than 30% since 2011. Although the company expects international sales growth to stall in 2016, it expects growth to resume after next year.
Shareholders’ Reward
L-3 Communications’ strong balance sheet provides financial flexibility in matters of incremental dividends, ongoing share repurchases and earnings accretive acquisitions. Free cash flow at the end of the first quarter of 2016 was $84 million compared with $73 million a year ago. The company expects to generate free cash flow of $825 million this year.
A commitment to deliver value to its shareholders will serve L-3 Communications well over the long haul. In the first quarter, the company repurchased $198 million of its stock and paid $58 million in dividends, returning in aggregate almost $256 million in cash to shareholders (compared with $158 million in the year-ago quarter).
Risks
A large percentage of L-3 Communications’ business is generated from the U.S. government, which represented about 70% of total 2015 sales. Yet, sales from the U.S. government declined 2% year over year in 2015. The company expects sales from the U.S. government, including the DoD, to be down 2% organically in 2016. The final withdrawal of U.S. troops from Afghanistan this year will hurt sales by about $135 million.
Although the company is expanding its international presence, the strong dollar will act as a hindrance to non-U.S. growth. The company expects international sales to decline about 15% in 2016 from 2015 levels.
Zacks Rank
L-3 Communications currently holds a Zacks Rank #2 (Buy).
A couple of other well-ranked stocks in the broader aerospace and defense space include Leidos Holdings, Inc. (LDOS - Free Report) and Engility Holdings, Inc. , both with a Zacks Rank #2 (Buy).
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L-3's Business Moves Impress, Afghanistan Drawdown to Hurt
We have updated a research report on L-3 Communications Holdings, Inc. on Jun 14, 2016. The company’s endeavor in transforming its business portfolio to defense electronics, communications and ISR markets is partly being offset by its over dependence on government orders and budget volatility in the U.S.
L-3 COMM HLDGS Price and Consensus
L-3 COMM HLDGS Price and Consensus | L-3 COMM HLDGS Quote
Business Transformation
L-3 Communications is gradually transforming its business portfolio to bring more focus to defense electronics, communications and ISR markets where it has leading positions.
To that effect, the company completed the sale of its National Security Solutions (NSS) division to CACI International (CACI - Free Report) for $550 million in cash earlier this year. It had also offloaded Klein Associates, a small side scan sonar business, earlier. Late last year, L-3 Communications acquired a Nashville-based company − ForceX, Inc. − that specializes in ISR mission-management software and geospatial application technology. The acquired entity, renamed L-3 ForceX, was merged with L-3’s Integrated Sensor Systems (“ISS”) unit within the Electronic Systems business segment. It expects the acquired business to add $30 million to sales in 2016.
International Focus
A steady flow of foreign military sales contracts will help counter the volatile defense budget impact. L-3 Communications’ international and commercial sales represented about 30.3% of its consolidated net sales in 2015 compared with 29% in 2014. The company has expanded its international sales by more than 30% since 2011. Although the company expects international sales growth to stall in 2016, it expects growth to resume after next year.
Shareholders’ Reward
L-3 Communications’ strong balance sheet provides financial flexibility in matters of incremental dividends, ongoing share repurchases and earnings accretive acquisitions. Free cash flow at the end of the first quarter of 2016 was $84 million compared with $73 million a year ago. The company expects to generate free cash flow of $825 million this year.
A commitment to deliver value to its shareholders will serve L-3 Communications well over the long haul. In the first quarter, the company repurchased $198 million of its stock and paid $58 million in dividends, returning in aggregate almost $256 million in cash to shareholders (compared with $158 million in the year-ago quarter).
Risks
A large percentage of L-3 Communications’ business is generated from the U.S. government, which represented about 70% of total 2015 sales. Yet, sales from the U.S. government declined 2% year over year in 2015. The company expects sales from the U.S. government, including the DoD, to be down 2% organically in 2016. The final withdrawal of U.S. troops from Afghanistan this year will hurt sales by about $135 million.
Although the company is expanding its international presence, the strong dollar will act as a hindrance to non-U.S. growth. The company expects international sales to decline about 15% in 2016 from 2015 levels.
Zacks Rank
L-3 Communications currently holds a Zacks Rank #2 (Buy).
A couple of other well-ranked stocks in the broader aerospace and defense space include Leidos Holdings, Inc. (LDOS - Free Report) and Engility Holdings, Inc. , both with a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>