L-3 (LLL): Intelligence in defense

"Regardless of how bad the broad market is hurting, one sector has shown an uncanny ability to take a punch: aerospace & defense," notes David Fessler.

In the industry-leading The Oxford Club he explains, "That’s because U.S.defense spending is uncorrelated with interest rates, inflation, housing prices, consumer confidence and the like." Here, he looks at L-3 Communications (NYSE: LLL).

"All told, America’s military machine will eat up $648 billion this year. Spending on new weapons, ammunition, logistics, communications and other services will be the highest on record. As long as budgets are stout, defense contractors will keep pumping out the profits.

"L-3 Communications (NYSE: LLL), one of the leaders in the field of intelligence, surveillance and reconnaissance services to a number of branches of the U.S. government.

"Formed in 1997 – from six former Lockheed business units – L-3 has rapidly risen to become the sixth-largest defense contractor in the United States.

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"The company’s main customer base – one of the safest in the world – is a virtual who’s who of U.S. defense players, including the Department of Defense, Department of Homeland Security, the Central Intelligence Agency, the National Security Agency and the FBI.

"And if you’d like to know more about L-3’s active projects, the old adage, 'I could tell you, but then I’d have to shoot you,' certainly applies. Truth be told, only L-3 knows. And it’s not telling.

"What we do know is that the company is building the next generation of super-secret encryption and data gathering systems. L-3’s technology is pivotal in keeping the bad guys from pulling off another 9/11, or worse.

"And fortunately for shareholders, L-3 does just as good a job earning profits as it does foiling potential terrorists. Three of L-3’s four business segments posted higher profit margins last year, growing a vibrant 30 basis points company-wide.

"That fact enabled L-3 to post full-year earnings of $5.98 a share, which came in above Wall Street expectations. And by the looks of its most recent quarter, the company’s on pace to do it again.

"L-3’s recent first-quarter results were impressive. The bottom line swelled to $192 million, or $1.54 a share, compared with $162.1 million, or $1.29 a share, a year earlier. That’s a 19% spike on only an increase of 6% in sales.

"Most importantly, however, the company also raised its 2008 EPS forecast by 12 cents a share and bumped its sales forecast up another $500 million. And Wall Street typically smiles favorably on such good news.

"The good news for shareholders is that the company plans to repurchase $400 million of stock this year. Management has already delivered partly on that promise, using the first-quarter’s credit crunch-induced weakness to repurchase some $283 million in shares.

"But another $117 million of buying still lies ahead. As a shareholder, you’ve got to love the vote
of confidence the buying demonstrates. In addition, L-3 has also raised its quarterly dividend to $0.30. That’s an increase of 33% over last year.

"It’s true, some election years have been historically worrisome times for defense contractors – particularly when the political rhetoric leans in the direction of cutting the defense budget. But when all the pontificating dissipates, there is a universal belief that we need to have a strong military.

"And that’s good news for L-3’s bottom line. So grab some shares ahead of management’s next big stock buyback. Buy L-3 Communication Holdings at market. And use a 25% trailing stop to protect both your principal and your profits."