L-3: A Pentagon Play

06/27/2016 7:00 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

When it comes to defense spending, America has no peer; our $598 billion defense budget in 2015 nearly matched that of the next 14 largest spenders, explains Mike Cintolo, editor of Cabot Top Ten Trader.

Defense contractors are the beneficiaries of all that spending, and L-3 Communications (LLL) is one of the Pentagon’s biggest customers.

The company just inked a $1.9 billion deal to provide airframe contractor logistics support for KC/KDC-10 tanker aircraft.

Prior to that, L-3 was awarded a $302 million contract with the US Navy to supply materials for and perform maintenance on several trainer aircraft.

In addition to aircraft supplies and support, L-3 Communications makes everything from night vision goggles to advanced security systems.

Sales have actually been on steady decline during the last few years, but margins are on the rise, and the company was remarkably profitable in the first quarter, with earnings per share up 51% from a year ago.

Better cost controls and lower taxes helped boost margins and earnings per share growth during the quarter.

And sales weren’t all bad: The US government is L-3’s core business, accounting for 72% of sales, and it grew organically by 4% in the first quarter.

The dividend is also becoming more of an attraction: L-3 increased its quarterly payout from $0.65 to $0.70 in February, and the yield is up to 1.9%.

Between the two recent big contracts, the huge first-quarter EPS growth and the rising dividend, there’s a lot for investors to like about L-3.

LLL bottomed at $104 last September and after a big late-year rally, came crashing back to $108 in late January. It quickly recovered to the $115-$120 range, and broke out in a big way in late April, rising to $137.

Another push higher started in late May, with the stock recently touched $147. LLL hasn’t dipped below its 50-day moving average since mid-February, so buy on dips and use that line as your stop.

Subscribe to Cabot Top Ten Trader here…

By Mike Cintolo, Editor of Cabot Top Ten Trader

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