A Year Later, L-3 Still Looks Good

In prepping for L-3 Communications' (NYSE:LLL) earnings, I was surprised to see that I hadn't written on the company at all since last year's fourth-quarter earnings. In that time, the stock has done so-so -- better than the market overall and better than small defense/intelligence electronics players such as Applied Signal (NASDAQ:APSG) and Argon ST (NASDAQ:STST), but not as well as some of the bigger contractors like Lockheed (NYSE:LMT) or Raytheon (NYSE:RTN).

Stock performance aside, the business seems to still be running quite smoothly. Sales for the quarter were up almost 52%, and while the considerable majority of that amount came from acquisitions, nearly 11% organic growth is nothing to sneeze at. Operating profit growth trailed revenue growth (up more than 39%) as lower-margin business from the Titan acquisition pushed down overall performance.

As for potential future business, funded orders grew 32% in the quarter, and the funded backlog grew 47% to a little more than $7 billion.

In the company's two largest segments, C3ISR (command, control, communications, intelligence, surveillance, and reconnaissance) and government services, L-3 saw double-digit growth in organic sales and operating income, though the Titan acquisition hurt margins in each case. Revenue growth in aircraft modernization and maintenance and specialized products was of the single-digit variety (on an organic basis), but both also produced double-digit organic income growth.

I'm sure that ongoing uncertainties about future growth (and/or profitability) are why the stock still looks attractively priced. After all, growth through ongoing acquisition can be tricky, and plenty of folks got burned by WorldCom and Tyco (NYSE:TYC). Plus, as L-3 gets bigger (it's already a top-10 contractor), growth will be that much harder to sustain. And then you have the return on invested capital -- which isn't all that good right now.

All that aside, I'm cautiously positive on L-3. I do believe that L-3's size makes it increasingly vulnerable to general budget trends, but I think communications and electronics will continue to be a high-priority area. What's more, given some time to digest, integrate, and improve on its acquisitions, I think that ROIC can get better. Even with modest growth assumptions, the stock looks interesting here, so it's probably worth a Fool's time to dig deeper.

For more defensive Foolishness:

• Green Lights for Applied Signal?
• Should Investors Nab Argon ST?
• L-3 Is A-OK

Tyco is a Motley Fool Inside Value recommendation. For more coverage of the market's best undervalued stocks, take Philip Durell's Inside Value for a free 30-day spin.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).