Despite all the talk of constriction in the credit markets, Wall Street's buyback binge continues.
Earlier this week, we took a look at the logic behind General Dynamics' (NYSE:GD) decision to spend nearly one billion bucks on its own stock. Today, we examine the latest adherent to the "Corporation, buy thyself" philosophy -- fellow government contractor L-3 Communications (NYSE:LLL), which on Tuesday announced that its board has authorized the repurchase of up to $750 million worth of its own shares over the next couple of years.
For the record, L-3 is putting the finishing touches on a half-billion-dollar buyback authorized back in December 2006. With the last few dollars of that effort slated to be spent by year's-end, it's time to refill the till for another round. But with the company having just lost -- finally and definitively this time -- a military translation contract worth up to $4.7 billion, is now really the time to be searching the corporate sofas for buyback funds? And even if L-3 has the necessary cash, should it spend it, or save it for a recession-y day?
Can it pay?
Not just yet, but perhaps soon. L-3 currently has just $725 million in cash and cash equivalents on its balance sheet, as compared to a whopping $4.5 billion in long-term debt. The good news, though, is that L-3 generated more than $1.1 billion in free cash flow over the last 12 months. If it can keep that free cash flowing, then $750 million in share buybacks over the next 24 months should be entirely doable.
Should
it pay?
Absotively. Posilutely. When you compare L-3 to its major rivals in the defense sphere, there's no question that these shares are undervalued.
|
P/E |
Price-to-Free |
Projected | |
|---|---|---|---|
|
General Dynamics |
20 |
17 |
11% |
|
L-3 |
19 |
12 |
17% |
|
Lockheed Martin |
16 |
14 |
12% |
|
Northrop Grumman |
16 |
15 |
13% |
|
Boeing (NYSE:BA) |
17 |
8 |
16% |
I mean, sure, at first glance L-3 has the second-highest P/E in the group. It's second only to General D, which we decided yesterday should under no circumstances be a buyer of its own shares. But look a little closer and what do we find: The second-lowest price-to-free cash flow ratio in the industry and the fastest growth rate of the bunch.
Foolish takeaway
If you ask me, the question isn't whether L-3 should be spending meager savings buying its own shares. It's more a question of: Should L-3 be mortgaging the house, holding a yard sale, and pushing the kids to take paper routes to raise cash to buy more shares?
This is an all-you-can eat moment, folks, and not only should L-3 buy its shares -- you should, too.
