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L-3 (LLL) Up 5.1% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for L3 Technologies . Shares have added about 5.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is L-3 due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

L3 Technologies’ Q1 Earnings Beat, 2019 Sales View Up

L3 Technologies reported first-quarter 2019 adjusted earnings of $2.89 per share from continuing operations, which surpassed the Zacks Consensus Estimate of $2.52 by 14.7%.

Excluding one-time items, the company reported GAAP earnings of $2.71 compared with $2.34 registered in the year-ago quarter.

The year-over-year bottom-line improvement can be attributed to solid sales and operating income growth in the reported quarter.

Total Sales

In the quarter under review, total sales came in at $2.70 billion, outpacing the Zacks Consensus Estimate of $2.52 billion by 7%. The topline also improved 14% year over year.

Organic sales to the U.S. government rose 18%, while that tointernational and commercial customers improved 6%. Overall, organic sales increased 14%.

Orders & Margin

Funded orders in the first quarter totaled $3.38 billion, reflecting a 28% surge from the year-ago quarter. Funded backlog was $10.40 billion as of Mar 29, 2019, up 7% from $9.70 billion as of Dec 31, 2018.

Operating margin expanded 90 basis points (bps) to 11.5% in the reported quarter.

Segmental Performance

Electronic Systems: Net sales at the segment rose 2% to $662 million from the prior-year quarter’s $648 million driven by organic sales growth.

Operating income summed $97 million compared with $94 million in the year-ago quarter. As a result, operating margin expanded 20 bps to 14.7%.

Intelligence, Surveillance and Reconnaissance Systems (ISRS): The segment recorded net sales of $1,253 million in the first quarter, up 23% year over year. The upside can be attributed to higher sales volume related to procurement and ISRmissionization of business jet aircraft systems. Also, increased deliveries of night vision products to an international customer and that of airborne turret systems to U.S. and foreign militaries contributed to the top line.

While operating income increased to $130 million from $93 million in the year-ago quarter, operating margin expanded 120 bps to 10.4%.

Communications and Networked Systems (C&NS): Net sales at this segment increased 11% to $785 million owing to higher production volume for Unmanned Aerial Vehicle (UAV) communication systems as well as increased deliveries of mobile and ground-based SATCOM systems.

Operating income improved 31% to $84 million while operating margin expanded 160 bps to 10.7%.

Financial Position

As of Mar 29, 2019, L3 Technologies had $1,108 million in cash and cash equivalents compared with $1,066 million as of Dec 31, 2018.

Long-term debt as of Mar 29, 2019, was $3,322 million, almost in line with that at the end of 2018.

Net cash inflow from operating activities totalled $174 million at the end of the first quarter compared to the year-ago cash outflow of $35 million. Capital expenditures summed $49 million compared with the year-ago figure of $56 million.

2019 View

L3 Technologies has revised its guidance for 2019. The company now anticipates net sales of $10.90 billion compared with$10.75 billion projected earlier. The Zacks Consensus Estimates for current-year sales, pegged at $10.78 billion, is below the company’s latest guidance.

The company, however, continues to project operating margin of 12%. Meanwhile, the effective tax rate is now expected to be 19% instead of prior projection of 20%. Additionally, it now expects net cash of $1,285 millionfrom operating activities, slightly up from earlier estimate of $1,275 million.

Expectation for free cash flow now stands at $1,055 million compared with the earlier projection of $1,045 million.



 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, L-3 has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, L-3 has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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