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L-3 Comm. Gets Iraqi Contract

Zacks Equity Research

L-3 Communications Holdings Inc. (LLL) announced that its Link Simulation & Training or L-3 Link division has been awarded a contract from the U.S. Air Force Life Cycle Management Center at Wright-Patterson Air Force Base near Dayton, Ohio, to build two F-16 Block 52 Full Mission Trainers or FMTs for the Iraqi Air Force.

The F-16 Block 52 FMTs, being built at L-3's Arlington, Texas facility, will incorporate the company's HD World integrated simulation product line. High-definition databases, image generators, SimuSphere HD-9 visual displays and physics-based processing technology will produce highly realistic and relevant fighter training environments within a geo-specific visual system database of Iraq.

The FMTs will incorporate L-3's simulated Joint Helmet Mounted Cueing System, enabling pilots to view flight information at all times while conducting a flight. This simulation capability will allow pilots to practice control of aircraft targeting systems and sensors.

L-3 Communications is the leading provider of F-16 simulators worldwide. Since the 1970s, the company has delivered over 140 F-16 training devices in support of the U.S. Air Force, Air National Guard and international militaries.

L-3 Communications Holdings operates through its wholly owned subsidiary, L-3 Communications Corporation. L-3 Communications is a leading supplier of a broad range of products and services used on a number of aerospace and defense platforms. In addition, the company is a prime system contractor for aircraft modernization and maintenance; simulation and training; and government systems support services.

We believe that L-3 Communications over the longer run is one of the best-positioned pure defense players based on its non-platform focus, prominent position as sub-contractor/supplier to other defense primes, broad diversification of programs and strong order bookings. Its strong balance sheet also provides financial flexibility to increase its dividend, indulge in share repurchases and earnings accretive acquisitions.

We believe future growth will come from its strong presence in the areas it currently focuses on. These include command, control, communications, intelligence, surveillance and reconnaissance (C3ISR) equipment; precision-guided weapons; unmanned aerial vehicles (UAVs); and other electro-mechanical robotic capabilities, networked information technologies, special operations forces, platform upgrades and counterterrorism initiatives.

On the flip side, however, a substantial portion of L-3 Communications’ business is generated within the U.S, with government and commercial sales accounting for more than 80% of total sales. Budget deficits and political uncertainty loom large on future defense budgets with high chances of shrinkage.

Moreover, more than half of L-3 Communications’ sales come from fixed priced contracts. Consequently, the company will only be able to make a profit if costs stay within the set limits. Given these headwinds, we maintain our Neutral stance on L-3 Communications. The company now has a Zacks Rank #3 (Hold).

We presently prefer other operators in the aerospace and defense sector, like Huntington Ingalls Industries Inc. (HII), Lockheed Martin Corporation (LMT), and The Boeing Company (BA), all carrying a Zacks Rank #2 (Buy).

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