L-3 Communications (NYSE:LLL) reported fiscal 2008 earnings on Thursday, and for the life of me, I cannot understand why the stock is not trading higher today. I mean, just get a load of these numbers, folks:

  • Q4 sales grew 5% to $4 billion.
  • For the year, sales were up even more -- 7% -- to $14.9 billion.
  • Operating margins for the year rose to 10.4%.
  • That still puts L-3 pretty far back in the pack of defense contractors; profitability-wise, its margins lag those of Lockheed Martin (NYSE:LMT), Raytheon (NYSE:RTN), and Honeywell (NYSE:HON), in that order. Still, its lead over Boeing (NYSE:BA) and Northrop Grumman (NYSE:NOC) remains substantial.
  • Last but not least, profits for the year grew 30% to $7.72 per share.

Granted, the Q4 results underwhelmed in some respects. Sales growth was slower than the pace for the full year, and while profits per share leapt 36% for the quarter, much of this owed to a one-time gain from selling off an unspecified "ownership interest in a business," and much of the rest came from L-3 paying a lower tax rate for the quarter.

Still, to this Fool's mind, it's the big-picture viewpoint that really matters, and L-3 is looking pretty good in that regard. New, funded orders of products grew faster than sales in Q4, adding to the most reliable portion of the firm's backlog. That backlog now sits at $11.6 billion, up 21% from this time last year. With new business rolling in much faster than old work rolls out, L-3 looks poised to outperform the single-digit sales growth of yesteryear.

Best of all, L-3 continues to generate free cash flow far in excess of what its P/E suggests. Its free cash flow amounted to $1.2 billion for the year, or fully 25% better than net income reported according to GAAP.

As a result, L-3 currently sells for 8 times cash flow, or roughly 11 times once you net out cash and debt. Looked at the first way, the stock appears undervalued relative to analyst projections of 11% long-term profits growth -- or fairly valued relative to enterprise value.

Foolish takeaway
This, however, assumes that analysts are correct in projecting only 11% growth for L-3, but this figure may underestimate the company's ability to grow, as suggested by its backlogged work. If L-3 can transform that backlog into revenues, and perhaps push its margins up a bit closer to what its peers are earning, I wouldn't be surprised at all to see L-3 grow faster than the industry average. In which case, the stock looks eminently buyable.

Get the low-low-lowdown on L-3 in:

Fool contributor Rich Smith owns shares of Boeing. The Motley Fool has a disclosure policy.