Rising Star Buy: L-3 Communications

This article is part of our Rising Star Portfolios series.

I've mentioned L-3 Communications (NYSE: LLL  ) many times in passing, but this time, I'm going to put my money where my mouth is. I'm buying $1,000 worth of shares for my Rising Star Portfolio.

My rationale for this purchase is simple: This is a great business trading at a great price.

Great business
L-3 is the premier defense electronics company, with products and services that run the gamut from secure data links and smartphones to unmanned aerial vehicles, training simulators, and aircraft modernization facilities. Many of its products occupy niche markets with little competition. This strong moat, and the critical solutions the company provides, give L-3 a heavily fortified position in the defense marketplace.

L-3 should also be insulated from the defense budget pressures emanating from Capitol Hill. Unlike defense behemoths Boeing (NYSE: BA  ) or Lockheed Martin (NYSE: LMT  ) , L-3's products aren't platform-dependent, meaning they can be used on whatever aircraft platforms survive the possible defense cuts. If platforms get cut back, retrofits become more popular, and L-3 is in the sweet spot of that process with infrastructure (its Integrated Systems business) and products.

If the downside of government spending is potential cuts, the upside is insulation from the broader economy. More than 80% of L-3's revenue comes from the government, making the company essentially immune to economic pressures.

Great price
Usually, you'd have to pay up for this sort of business -- but defense spending fears have made it fairly inexpensive. L-3 expects to earn more than $8 per share this year, yet it trades for less than $80. On a free cash flow basis, L-3 should generate $1 billion in free cash flow, a hefty output on its $9.1 billion market cap. With earnings and free cash flow yielding 10%, this solid company is a wonderful buy.

Risks
I don't see much risk with this purchase, which is why I'm doing it. The company should grow faster than the defense budget, which won't drop as precipitously as media reports suggest. L-3's products are also very much in demand for their quality and value-creating properties -- something I like to see in any company, let alone a defense contractor.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Andrew Sullivan, CFA, owns options on L-3 Communications. The Motley Fool owns shares of L-3 Communications and Lockheed Martin. Try any of our Foolishnewsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1449894, ~/Articles/ArticleHandler.aspx, 8/29/2014 6:25:54 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement