L-3 Drones for Special Operations

L-3 Communications Holdings Inc. (LLL - Analyst Report) bagged a contract from the U.S. Special Operations Command for remotely piloted aircraft or drone support. The indefinite delivery, indefinite quantity contract with one base year and four option years is potentially worth up to $250 million. Work on the contract will be carried out in L-3's Geneva Aerospace unit in Carrollton, Texas.
 
The contract will boost the Specialized Products segment of L-3 Communications. Of late, the order backlog of the segment witnessed a steep decline. Funded backlog declined to $2.4 billion after the end of the first half of fiscal 2009 as compared to $3.1 billion in the year-ago period. Overall, L-3 Communications’ funded orders for the fiscal second quarter fell 20% to $3.3 billion, compared to $4.2 billion in the year-ago quarter. Funded backlog also decreased 3% to $11.2 billion, compared to $11.6 billion at Dec 31, 2008.
 
Based in New York, L-3 Communications is the foremost provider of Intelligence, Surveillance and Reconnaissance (ISR) systems and products; secure communications systems; aircraft modernization, training and government services; and is a merchant supplier of a broad array of high technology products. L-3's product mix is approximately 88% defense and 12% commercial. The company operates through four primary business segments: Specialized Products; Government Services; Aircraft Modernization and Maintenance (AM&M); and Command, Control, Communications and Intelligence, Surveillance, and Reconnaissance (C3ISR).
 
L-3 Communications is currently trading at a discount to its industry peers in terms of price-to-book, price-to-sales, and price-to-future cash flow. However by virtue of its non-platform focus and broad diversification of programs, the company warrants premium multiples compared to its peers. Additionally, the company’s ongoing share repurchase program will be accretive to earnings over the near term. Thus, we maintain our market Outperform recommendation on the shares.

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