One-Hour Analysis of L-3 Communications

Using some of our recommended tools and websites, here is what I learned about L-3 Communications in one hour of Internet research.

From Value Line

  • Stock is pretty cheap, 1x book, 10x EPS, 7x CF
  • But all of book value is goodwill, not great, but nor disqualifying
  • Not a lot of charge-offs, a major positive
  • Stock was a good relative performer until early 2009, since then it’s been miserable
  • Balance sheet has improved, but still is at best average
  • Consistent stock buybacks since 2006, a very positive sign
  • Dividend payout ratio about 25%, still room for small dividend increases
  • Interesting to see if they will increase dividend again this year
  • Relative PE has steadily declined from 1.5 to .5
  • The company only started in 1998, need to learn the history
  • About a $10/share underfunded pension, bad but not horrible
  • Had a spin-off during the year, how much did this help the numbers?
  • Consistent earning growth, a little too consistent, possible sign of financial engineering
  • Insiders have been selling, not a great sign

From the Footnotes

  • Wide variety of products, no one big contract, 25% non-defense
  • Book to bill has been about 1-1
  • Only 16% union, a good sign
  • Mix of fixed price and cost/plus contracts
  • Not a lot of recent acquisition activity, a good sign
  • Quite a reliance on leased facilities, could be a negative or a positive
  • Complicated accounting for completed contracts, a potential danger
  • A very complex goodwill footnote, this will need a lot more analysis
  • No significant legal issues, a good sign for this business

From Google Finance

  • Only one buy, 16 holds, and one sell – extremely hated by Wall Street, fantastically positive sign
  • Flat EPS forecast, maybe still a little high?, one low estimate of $6.15
  • Chairman was a past CFO, good sign, Founder died in 2006
  • Not a lot of value guys own, more GARPy, only a few gurus own including Barrow

From Seeking Alpha

  • No significant reports last two years
  • Activist investors reported 5% stale in June, 2011

Conclusion

  • Very interesting story, but some significant negatives, not a simple story
  • Interesting to see if goodwill write-down is needed
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