Richard Pzena (Trades, Portfolio) and James Barrow (Trades, Portfolio), the two largest shareholders of L-3 Communications (NYSE:LLL), reduced their positions in excess of 30% during the December of 2013. Post facto, and with additional info, it can be concluded that in the short-term the decision was correct. After all, by the end of January 2014, earnings per share dropped by 4%. Also, during fourth quarter fiscal 2013 revenues decreased 9% year-over-year. Additionally, the secure communications systems for intelligence, surveillance and reconnaissance aircrafts segment lost 13% in revenues, and the national security solutions segment decreased another 11%. Hence, the losses in the short-term are evident. However, can L-3 Communications pay returns in the long-term?
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- LLL 15-Year Financial Data
- The intrinsic value of LLL
- Peter Lynch Chart of LLL
Filling the Picture
Besides the drops on the mentioned indicators, L-3 Communications reported that cash and cash equivalents increased 43%, while deferred income taxes increased 19% and other current assets decreased 10%. All that contributed to a 3% increase in total current assets. At the same time, deferred debt issue costs decreased 17% while other long-term assets increased 42% causing total assets to appreciate by 1%.
Also, income taxes decreased by 52% helping current liabilities decrease by 2%, and pension and postretirement benefits decreased 47%, while deferred income taxes increased 95% making total liabilities decrease by 4%. Hence, the picture is not all bad and hides the improvements secured during the same period.
Another promising characteristic for L-3 Communications’ stock is the recently increased quarterly dividend payout, which carries a 30% discount to the industry average — all that amid the stock price continuing on the uptrend started in mid-2011. The positive results are closely related to the firm’s program execution capability, cost cutting initiatives and contribution by the international and commercial business, which helped the company to reward shareholders with a $1 billion payout.
Positive Remarks for the Long Term
Pzena and Barrow’s position reduction is a short-term winnings collection. Since over 60% of their investment remains in place, it is fair to conclude that long-term winnings are expected. Hence, there is enough evidence to justify taking a position, and the first indicator is acquisition and creation of new jobs. The firm has confirmed its good moment by announcing the acquisition of Data Tactics Corporation and addition of 60 new employees at its Broken Arrow facility.
Diversification has worked in favor of L-3 Communications. A characteristics that allowed the firm to avoid the budget cuts in defense contracts triggered by The Sequester helped by the priority given to its contracts by the Department of Defense. Both, diversification and high-priority will continue to provide the company a safeguard against a troubled industry, and a competitive advantage to continue absorbing weaker rivals, while strengthening its own market positioning.
Besides the U.S. Air Force s Predator Unmanned Aerial Vehicle program, there is a $357 million task order from the GSA Federal Systems Integration and Management Center and a $161.7 million worth of defense support, maintenance and modification contracts. In addition to the domestic US market, L-3 Communications has growth opportunities in the international market. Potential customers have shown great interest in the SPYDR ISR and maritime patrol programs.
Worth the Long Run
Last, to assess a company’s strength it is worth looking at the balance sheet, and L-3 Communications has one of the strongest in the industry. When compared to previous years there is a small decline on revenue and cash flow, but during the same period debt has been reduced and strategic acquisitions completed. Additionally, the stock repurchase program remains in place adding value to current shareholders positions. Hence, increasing your position or taking a new position in the company is recommendable if the investment is for long-term.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.