Warfare has come a long way from the days when two cavemen would bash each other with clubs until someone fell down, or got bored, and left. It's even come a long way in the past several years. As warfare, intelligence, and navigation have all grown more complex and dominated by high technology, L-3 Communications (NYSE:LLL) has grown right alongside.
L-3 has built itself up through a combination of focused internal growth and opportunistic acquisitions. For the fourth quarter of 2004, L-3 posted revenue of $1.9 billion -- up 29% from the same period a year ago. Roughly half of that growth (15%) was due to acquisitions, but organic growth of 14% was strong in its own right. While margins were a bit weak because of lower margins in two of the company's business units -- aircraft modernization and specialized products -- earnings still rose 12% over the prior year.
L-3 isn't afraid to do deals. In the fourth quarter of 2004 alone, the company purchased various units and businesses from the likes of General Dynamics (NYSE:GD), Boeing (NYSE:BA), Raytheon (NYSE:RTN), and CAE (NYSE:CGT). And Fools shouldn't expect that trend to change: The company says it's still on the prowl for complementary companies that have revenues in the range of $50 million to $300 million.
Despite all the time it has spent on acquisitions, management has also kept a sharp eye on the existing business. L-3 refers to free cash flow generation as its most important metric, and the results bear this out: FCF grew by more than 46% and ended the year at $552 million.
Orders are growing as the military moves toward more sophisticated weaponry and intelligence, and the company is looking for at least 17% revenue growth in 2005. Funded orders increased by 42% in the fourth quarter, to $2.1 billion, and funded backlog grew 22.2%, to $4.8 billion. Better still, L-3 might actually benefit from defense-budget revisions that put an increasing focus on system modernization, as opposed to new platforms. That plays directly into L-3's strong suit.
No one wants to go back to the old days of warfare, so it's a pretty good bet that the military will want ever more advanced equipment. With a strong legacy of organic growth and selective acquisitions to enter attractive niches, Fools should expect that L-3 will be there to capitalize on that demand.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
