L-3 Communications Holdings, Inc. (NYSE:LLL)

IP value.

Based upon historical earnings, I think this stock should be valued near $105.59 using discounted cash flows over the next 5 years. This produces a safety margin of 36%. Besides the earnings growth indicating the stock is under valued, this stock is due to have a spin-off next year which I believe will produce more value for shareholders. The only downside that I see is the pending defense cuts over the next year or so, but I believe this is a good long-term investment.

I work here, so not likely to make the bosses happy going bear on this one. I'm a forced shareholder through 401K match. This has nothing to do with the core business or management acumen. It's not even really a valuation call. The biggest problem lies in the defense support position to which L3 is married.

Whomever is President a large restructuring is on the way and by restructuring I mean a cut in defense contract. L3 has seen this coming and has routinely (over the past few years) underbid long term contracts with the government to avoid them being slashed in a budget contraction. I see them fundamentally not losing revenue but L3 is also very limited on where it can cut. Our employee based is highly specialized and often contracted to the government by filling an exact number of positions. The specialization means higher employee costs and (even with a declining defense industry) high turnover.

Most corporations in the defense industry can slash costs by slashing jobs, i.e. 3 employees can build a helicopter blade previously built by 4. L3 is contracted dramatically differently if your providing 5 hyper-spectral imagery analysts to five different army commands maintained all over the globe, you cannot cut that to 4. Thats both a good and bad thing, the work load will be steady but you are likely to see significant margin contraction as L3 gains market share by keeping the cost to the government low.

All in all I think its a great LONG term strategy, but I don't think its ideal for near term profitability and as defense stocks get shredded over the coming years I have a feeling most investors throw out LLL along with bathwater.

In short Love the company hate the stock at its current price and operating environment.

Pensions funding, reduced government spending, and acquisitions will either impact cash holdings or debt, putting pressure on the stock price for the foreseeable future.

12/10

High yield strategy: TMFHighYield says to look for "high dividend payers from the S&P 500 from diverse sectors, relatively low debt, and a history of increasing dividend payments." This is my Industrial Goods pick.

piotroski screen

buy on dip

Even if you shrink revenue by 50% over the next 10 years as plan by Obama Admin, this stock sell at nearly 30% below IV...

Have a patent portfolio containing 224 patents as per patentgenius.com and it is full of cash with 7.36$/share including long term investment.

Large enough safety margin in my book...

Very "defensive" business. FCF yield ridiculous at over 15%. Betting that markets are overestimating the effects of the Pentagon budget cuts.

LLL was a well run company with some impressive products and skills in the defense sector.

Now it's a well run company with impressive products and skills in the defense sector AND there's a historically successful activist fund pushing to unlock shareholder value. I'm in!

Relational Investors just reported that it is now the largest shareholder of the defense contractor L-3. I have had success following this activist investor in the past. Most recently when it successfully pushed for the break-up of ITT.

To unlock value, Relational is pushing for a the sale or spin-off of business units that it believes are dragging down L-3's performance. This may include the sale of the company's low-margin, no growth government-services division and its aircraft-maintenance division.

Divesting these businesses would enable L-3 to focus its resources on growing its high-margin businesses, including such as electronic systems and surveillance / intelligence.

Deej

Babo

Good solid company with good growth rates. I don't really think it going to blow the S&P out of the water but will stay with it.

This well run company is a steal at this price

tmfbabo

Mission critical defense is the part of the budget that will grow, not shrink.

This important government defense contractor has the right stuff for the right time.

Here's the rec:
http://www.fool.com/investing/value/2011/01/05/rising-stars-buy-cheap-defense-stocks.aspx?source=ihpsitota0000001&lidx=8