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Why L-3 Communications Has a Solid Future

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Defense contractor L-3 Communications (NYSE: LLL  ) recently posted earnings that beat analyst expectations, but its net income fell slightly as the Department of Defense cut back on spending.

In line with other companies that are mainly dependent on government defense-related orders, L-3 suffered as a result of the recent wave of Pentagon budget cuts. With revenue falling across its government services division, the company's diversification may prove to be a saving grace that could help offset some of its weakness.

Quick look at the quarter
During the quarter, L-3's sales, at $3.59 billion, were almost flat as compared to the previous year, while net income declined slightly to $201 million from $203 million last year. This translated into earnings of $2.01 per share, higher than Street expectations of $1.85 per share.

Defense doom
L-3's government services unit, which accounts for nearly 22% of its total revenue, witnessed an 18% decline in sales, as the government put a hold on defense-related spending. The results were evident in the lower revenue generated by Engility, the government services subsidiary that L-3 plans to spin off as a separate company during the latter half of this year.

As I said above, L-3 is not alone in bearing the brunt of reduced government expenses. Peer General Dynamics (NYSE: GD  ) also suffered a fall in its revenue to the tune of nearly 3% mainly because of greater dependence on the government for new orders. With the situation unlikely to improve, at least until the upcoming presidential elections in November, L-3 would do well to concentrate on its better-performing lines of business.

Businesses to bank on
On the brighter side, the company's C3ISR business experienced a 16% increase in sales, thanks to improved orders from foreign military buyers, higher demand for network communication systems, and other airborne support and logistic services.

Another dependable division is L-3's largest segment -- the electronic systems division. Although this division recorded a mere 1% growth in sales during the quarter, that was mainly because of acquisition-related charges. However, an increased focus on this business could mean less reliance on government orders for the company.

The Foolish takeaway
It's important to note that L-3 has raised its profit outlook for the entire year, showing that the company is confident that it can better offset the impact of possible cuts in government spending. Another thing helping L-3 is that there is a substantial $11.4 billion worth of funded backlog that should help maintain the company's growth prospects. While I think L-3 is a solid bet to outperform its peers, I would still prefer to watch it from a distance while defense cuts get sorted out. And if you want to stay updated on this stock as well, add L-3 Communications to your free Watchlist.

Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of L-3 Communications Holdings and General Dynamics. Motley Fool newsletter services have recommended buying shares of L-3 Communications Holdings. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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