Sunday, March 11, 2012

L-3 and the coming Budget Sequester

L-3 Communications (NYSE:LLL) stands out among pure defense players by virtue of its non-platform focus on shorter-cycle contracts. It has prospered the last few years because of the discretionary non-platform emphasis. Now with the looming defense budget cuts it may work against them.

"In the past the short-cycle business was favorable because of the constant increases in DoD budget; now with declining budget it works against them."

"So far the Pentagon has not actually reduced spending, but it has terminated programs deemed unnecessary or too costly and shifted the funds elsewhere." L-3's  pipeline of work is full but usually consist of 3 years or longer contracts cycle so the cuts haven’t been fully realized. A shorter cycle works against L-3.

L-3 has anticipated the budget cuts and debt crisis and has done a lot of adjustments last year; However, the  FY 2013 Budget has more cuts as the sequester threat continues.  In September, if the budget is not past again, sequester could make the cuts worse.

Budget cuts are in the Defense Department (DoD), but Homeland (DHS) & CIA/Intelligence Agencies monies have increased or remain the same.

Cyber and C3ISR  are divisions expected to prosper.

Spin-off  to be completed June 30th 2012.

L-3 is a good company in a bad sector.

L-3 is a serial acquirer with BIG goodwill - will probably be written-off next quarter or at spin-off?
p/e=7.52,p/bv=1.02, cash intensive in fixed asset, spin-off to reduce debt?, div increased
not favored by analysts - only 1 buy out 17 brokers in current month
10K - price=68.19, eps=9.07, fair value=201.89, long term potential 195%, bv=67.03
est earnings 1.88 vs 1.85 → eps=9.10, rev will go down, spin-off will break even?, earnings will break even?

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