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L-3 Gets U.S. Army Order

L-3 Communications Holdings Inc. (LLL) announced that its Westwood division has been awarded a contract to design and manufacture the next generation of 100 kW and 200 kW generator sets, known as Large Advanced Mobile Power Sources (:LAMPS), for the U.S. Army. The initial $11.5 million delivery order will provide Engineering and Manufacturing Development (EMD) over a 32-month period. Additionally, there are three production options (for a total of up to 36 months) with a contract ceiling price of $92.2 million.

LAMPS is a modernization program that will provide more mobile, reliable and logistically supportable tactical electric power sources for the U.S. Department of Defense’s (DoD) 21st century digitized forces. LAMPS will replace the currently fielded 100 and 200 kW Military-Standard generator sets procured from 1980 through 1992 and the Tactical Quiet Generator (:TQG) sets initially fielded in 2004. The new equipment will provide improved tactical electric power to combat, combat support and combat service support units across the U.S. Army and the other military services within the Department of Defense (DoD).

L-3 Westwood is a leader in the design and manufacture of Tactical Quiet Generator sets for the U.S. DoD. The company has designed and built electrical distribution and control equipment since 1968, including varied types of power and signal switchboards. L-3 Westwood equipment has been installed on a full range of naval vessels – from nuclear-powered aircraft carriers to destroyer escorts, submarines and special-purpose small boats. In addition, L-3 Westwood has extensive experience and a large library of design information to support these vessels. The company also designs and builds signal switchboards for all types of applications.

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.

Earlier, in July 2012, L-3 Communications completed the spin-off of 100% of a new, independent, publicly traded government services company – Engility Holdings Inc. (EGL) – to L-3 shareholders. We believe that L-3 Communications has ample opportunity for growth and profit expansion after the favorable conclusion of the spin-off of its Government Services businesses. The company has retained its profitable Cyber, Intelligence, and Security Solutions business. The spin-off also removes a lot of uncertainty with respect to revenue and takes away some of the low margin businesses of the company. Over the longer run, we view the company as one of the best-positioned pure defense players based on its non-platform focus, broad diversification of programs and its focus on shareholder value.

L-3 Communications is strengthening itself by focusing on improvement of operational efficiencies, investing in research and development to provide affordable solutions, acquiring businesses that will add new capabilities, and expanding product lines and divesting businesses. Moreover, its broad diversification of programs would provide growth momentum. Going forward, we expect future growth to come from the company’s strong presence in the current focus areas of C3ISR equipment; precision-guided weapons; unmanned aerial vehicles (“UAVs”); and other electro-mechanical robotic capabilities.

Over the longer run, we maintain our Neutral recommendation on the stock. The stock is currently trading at a discount to both the peer group and the S&P 500 based on forward earnings estimates. The discounted valuation is mainly because of the company’s non-platform focus, resulting in shorter cycle contracts, and its prominent position as sub-contractor/supplier to other defense primes. This also results in contracts expiring faster than its peers, bringing in the need of new ones to replace them. However, with domestic contracts drying up fast, the company’s growth will be influenced by its ability to capture new contracts going forward.

In the near term, the company is witnessing lower sales while higher competition has resulted in margin headwinds through re-competitions of existing businesses. Thus, we would advise investors to exit from the company for now until the ongoing macro headwinds abate. L-3 Communications currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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