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L3 Technologies Closes $540M Vertex Aerospace Divestiture

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L3 Technologies, Inc. (LLL - Free Report) recently made an announcement regarding completion of its Vertex Aerospace business’ sale to a New York-based private equity firm named American Industrial Partners, for $540 million. The transaction, which was originally approved in October 2017, was finally wrapped up on Jun 29, 2018.

The terms of the agreement also included divestiture of the company’s Crestview Aerospace and TCS business units. While Crestview provides rotary aircraft component fabrication and assembly services, TCS provides engineering services and logistics support.

Reasons Behind the Divestiture

The contract price modifications at the Vertex Aerospace unit have lately raised concerns about growth in L3 Technologies’ Aerospace Systems segment.  In fact, the company identified the unit to be its most challenging business, and remained skeptical about its growth rate and profitability.

Consequently, the company decided to divest the Vertex Aerospace business along with the other two units, in order to exit the logistics solution and maintenance services business for military aircraft, where it does not provide complex ISR systems integration and modification.

Our View

L3 Technologies' decision to sell off its Vertex Aerospace unit along with other smaller units is a strategic step toward aligning and optimizing its portfolio. The divestiture is likely to allow the company focus its resources on higher value-added and more profitable businesses.

Economically, the transaction should be beneficial for the company, as it expects to record a gain of approximately $400 million after tax, owing to the divestiture. We may expect L3 Technologies to invest the cash proceeds from this deal in its continued core operational growth, in line with its capital allocation strategies and plans.

Companies mostly divest their business units either to shed of segments that are not part of their core operations, to strengthen their core portfolio and serve better, or to eliminate poor-performing units. In case of the aforementioned divestiture, both these agendas were appropriate. Such divestitures are nothing new in the defense space.

For instance, Leidos Holdings (LDOS - Free Report) has recently announced its agreement to divest its commercial cyber security arm to Capgemini, as this unit was not performing very well in the disaggregated cyber
security market.

Price Movement

Shares of L3 Technologies have rallied 13.5% year to date, lagging the industry’s growth of 22.6%. The underperformance can be attributed to low contract orders for the company from international markets and weak performance in some of the product lines.

Zacks Rank & Key Picks    

L3 Technologies currently has a Zacks Rank #3 (Hold). A few better-ranked stocks in the same sector are Kratos Defense & Security Solutions (KTOS - Free Report) and CPI Aerostructures, Inc. (CVU - Free Report)

While Kratos Defense & Security Solutions sports a Zacks Rank #1 (Strong Buy), CPI Aerostructures carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kratos Defense & Security Solutions delivered an average positive earnings surprise of 9.52% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen 11.8% to 19 cents in the last 90 days.

CPI Aerostructures delivered an average positive earnings surprise of 20.08% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen 8.86% to 86 cents in the last 90 days.

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