Please ensure Javascript is enabled for purposes of website accessibility

Was 2013 the High-Water Mark for L-3 Communications Holdings, Inc.?

By Rich Smith - Feb 2, 2014 at 6:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Thursday's earnings beat could be hard to repeat.

Defense contractor L-3 Communications (LLL) enjoyed a banner year for its stock in 2013, gaining 39% in 12 months of trading. But heading into its Thursday earnings report, things were looking pretty bleak for the company. Earnings for the year were expected to be only $8.30 or thereabouts, less than a 4% increase over 2012 levels, and probably too little growth to support the stock's 13-times earnings P/E ratio. But then the numbers came out, and a miracle happened:

  • 2013 sales declined 4% to just $12.6 billion, setting the stock up for a big drop in profits.
  • Operating profit margins slipped 30 basis points (to 10%), potentially magnifying the drop.
  • Yet somehow, L-3 managed to grow its earnings per share anyway -- up nearly 7% to $8.54.


Well, a couple of factors worked to L-3's benefit in 2013. For one thing, with profitability being a bit lower, taxes didn't bite as deep. L-3's effective income-tax rate declined by four full percentage points, to 28.2%. For another thing, this defense company did what it could to defend its shareholders, deploying cash in a series of buybacks that shrank its share count by nearly 7%.

Result: Even though overall net profits declined, the fact that these profits were spread out among fewer shares resulted in a modest increase, rather than a decrease, in profits per diluted share.

Second verse, same as the first
L-3 shareholders had better hope L-3 makes even more buybacks this year. Otherwise, 2014 could prove painful. The company is projecting further slippage in sales, with full-year 2014 revenues estimated at no more than $12.1 billion -- another 4% decline. Curiously, however, the company believes it will find a way to squeeze extra profits out of these reduced revenues, and grow its operating margin back up to 10.5%.

That would be a neat trick, but even if L-3 manages to pull it off, an anticipated rise in effective tax rates, to 33%, could end up reducing profits per diluted share to as little as $8.15 per share. Absent further help from buybacks, that could result in an earnings decline of as much as 5% in 2014 -- even worse than what analysts are already expecting.

Given that the analysts already aren't expecting much out of L-3, and are projecting long-term earnings growth of only 2.4% annually, a failure to clear an already low bar could trip up L-3's stock pretty badly.

Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of L-3 Communications Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

L3 Technologies, Inc. Stock Quote
L3 Technologies, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.