Defense contractor L-3
What analysts say:
- Buy, sell, or waffle? Nineteen analysts follow L-3, which garners a dozen buy ratings, five holds, and a pair of sells.
- Revenues. On average, they expect to see sales increase 25% to $3.1 billion ...
- Earnings. ... but for profits to rise only 14% to $1.27 per share.
What management says:
Actions speak louder than words, they say. So what do you think L-3 was saying when, in August, its board approved a "change in control" program? Like a good mother packing her schoolchildren's lunch boxes with bologna sandwiches and Oreo cookies, L-3's board lovingly attached a golden parachute to the employment contracts of each of its most senior executives.
In the event the company is acquired and any of its VIP employees terminated, they will receive severance benefits equal to from one to three years' worth of their annual salaries and average bonuses over the three years preceding dismissal. "Other," non-senior employees get more of a "golden handkerchief" -- four weeks' salary, plus a couple extra weeks per year of employment with the company.
Why the sudden concern over severance packages? With L-3's share price now down 5% over the last 52 weeks -- in contrast to the 15% gains S&P 500 owners have enjoyed, and the even larger gains at competitors like Honeywell
What management does:
As you can probably guess from the stock's performance, L-3 hasn't been setting any records for corporate profitability lately. Rolling gross margins were, at last report, down 130 basis points over the last 18 months, and rolling operating and net margins have been sliding all year long as well.
|
Margins % |
3/05 |
6/05 |
9/05 |
12/05 |
3/06 |
6/06 |
|---|---|---|---|---|---|---|
|
Gross |
13.9 |
13.9 |
13.5 |
13.0 |
12.8 |
12.6 |
|
Op. |
10.9 |
10.9 |
10.8 |
10.6 |
10.5 |
10.3 |
|
Net |
5.6 |
5.7 |
5.6 |
5.4 |
5.2 |
4.2 |
One Fool says:
Interim CEO Michael Strianese tried to put a brave face on a difficult situation last quarter, calling L-3's performance "excellent." And it was pretty excellent, actually -- right up until the firm got hit with a total of $0.84 per share in after-tax charges for stock options and a court case gone bad. That one quarter's disastrous events knocked a full percentage point off the rolling net margin, a net that was already looking pretty weak to begin with.
But here's the thing: Year-to-date, the business has generated $408 million in free cash flow. Strianese thinks the firm is good for $825 million by year-end, assuming the jury verdict that ruined last quarter's GAAP results doesn't become final this year. With motions (to reduce the verdict or order a new trial) in the air, and the possibility of a lengthy appeals process ever-present, chances are good that the GAAP charge will cost L-3 considerably less when and if it's converted into a cash settlement.
The board apparently believes that with its stock price stuck in reverse, and free cash flow abundant, the business will inevitably attract hostile suitors from which management must be protected. I can't say I disagree -- but I still wouldn't encourage Foolish investors to buy this company's shares in hopes of getting a premium. With an enterprise value-to-free cash flow ratio of 17, but long-term profits growth predicted to average 12% per year, it still doesn't look like a bargain. Sure, a buyout could net you a premium -- but if it doesn't happen, you could well find yourself stuck with an overpriced company.
Competitors:
-
Boeing
(NYSE:BA) -
General Dynamics
(NYSE:GD) -
Northrop Grumman
(NYSE:NOC)
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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.
