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
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
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.