This article is part of our Rising Star Portfolios series.
I've mentioned L-3 Communications
My rationale for this purchase is simple: This is a great business trading at a great price.
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
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.
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.
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.
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