L-3 Communications Holdings Inc. (LLL - Analyst Report) reported better-than-expected third quarter 2011 results on October 28, 2011. In the quarter, the company reported diluted earnings per share of $2.24, comfortably surpassing the Zacks Consensus Estimate of $2.15 and the year-ago quarterly earnings of $2.07 per share.
In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts? estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.
Third Quarter Highlights
L-3 Communications? quarterly net sales fell by 1.3% year over year to $3.8 billion, and also missed the Zacks Consensus Estimate by $59 million. Sales performance reflects areas of competitive strength as well as a challenging defense budget environment.
Sales growth from the Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) and Electronic Systems segments was offset by lower sales from the Government Services and Aircraft Modernization and Maintenance (AM&M) business wings.
L-3 Communications? Operating income decreased by 7.1% year over year to $406 million. Operating margin contracted 70 basis points to 10.7%. Lower operating margins in the Government Services and Electronic Systems segments were partially countered by higher operating margins for the C3ISR and AM&M segments. Net income also decreased by $3 million year over year to $235 million.
(Read our full coverage on this earnings report: L-3 EPS Beats, Ups View)
Agreement of Analysts
L-3 Communications, following the earnings release, witnessed mixed estimate revision trends for the short and the long term. Over the past month, only 2 analysts (out of 15) revised estimates positively for the ongoing quarter, while 11 revised their estimates downward. The pessimism stems from increased budgetary pressure and funding delays for major contracts like the Joint Cargo Aircraft order.
However the trend reverses from the standpoint of market perception for the company performance evaluated over the whole ongoing fiscal. Over the past month, 11 out of 15 analysts revised their estimates upward for fiscal 2011, with only 2 downward revisions.
Such an upward revision clearly depicts the analysts? optimism about deft handling of its ongoing spin-off of a part of it?s existing Government Services segment. The new public company will be named as Engility and will be a leader in Systems Engineering and Technical Assistance (SETA), Training and Operational Support services for the Department of Defense (DoD) and other U.S. Government agencies, as well as civil and international customers. The transaction is slated to finish in mid-2012.
Currently, the Zacks Consensus EPS Estimate for the fourth quarter of 2011 is pegged at $2.45 per share with a projected annual growth of 3.40%. Similarly, for fiscal 2011, the current Zacks Consensus EPS Estimate of $8.79 per share reflects a year-over-year gain of 5.36%.
Magnitude of Estimate Revisions
Mixed market perceptions for L-3 Communications? fortunes for the short term and long term are also reflected in the magnitude of estimate revisions. Near-term road bumps due to lower revenue from major programs led the downtrend for the Zacks Consensus Estimates going forward. The magnitude of revisions from the past month resulted in estimates moving down by five cents to $2.45 for the ongoing quarter.
On the other hand, the current Zacks Consensus Estimates for fiscal 2011 is $8.79. Over the last month, estimates have jumped up by 7 cents fuelled by lower pension headwinds and steady move towards separation of a part of its Government Services segment which in the third quarter reported lower numbers.
Our Take
L-3 Communications stands out among pure defense players by virtue of its non-platform focus, broad diversification of programs, strong order bookings and funded order backlog of $11.5 billion versus $11.1 billion at fiscal end-2010.
Revenue and earnings growth continues to be driven by its strong presence in the current focus areas of C3ISR equipment, precision-guided weapons, unmanned aerial vehicles (UAVs), and other electro-mechanical robotic capabilities, networked information technologies, special operations forces and missile defense.
L-3 Communications? strong balance sheet provides financial flexibility in matters of incremental dividend, ongoing share repurchase and earnings accretive acquisitions. As of third quarter-end of 2011, the company had a low long-term debt-to-capitalization of 37.4% (Zacks industry average was 42.4%) with a total long-term debt of $4.1 billion, along with cash holdings of $538 million and an unutilized credit facility close to $990 million.
L-3 Communications? topline is spread over a large number of contracts in process. In fiscal 2010, its largest contract in terms of annual sales was the Army Fleet Support contract with the U.S. Army Aviation and Missile Command, which accounted for only 3% of its sales. A diversified revenue base insulates the financial performance of the company from any contract-specific risk.
L-3 Communications? presently retains a short-term Zacks #3 Rank, which translates into a short-term Hold rating. We have a long-term Neutral recommendation on the stock. In-lieu of the uncertainty in the movement of the defense budget the sideways stance is consistent with its peers like Raytheon Company (RTN - Analyst Report) and FLIR Systems, Inc. (FLIR - Analyst Report).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These ?Earnings Estimate Scorecard? articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
Read the full analyst report on LLL
Read the full analyst report on FLIR
Read the full analyst report on RTN
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Source: http://www.zacks.com/stock/news/64439/Earnings+Scorecard%3A+L-3+Communications
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