Excerpts from this article below...
When a stock suddenly cuts its guidance for sales and earnings, raised price targets and analyst upgrades are not the reactions you'd expect to see from Wall Street -- and yet, that kind of seems like what's happening at L-3 Technologies (NYSE: LLL) today.
Let's not bury the headline: L-3 Technologies says it expects to grow sales only about 5% year over year in 2018, to $9.95 billion (give or take $100 million). Furthermore, L-3 will earn an 11.3% operating profit margin on that revenue, resulting in operating profits of roughly $1.12 billion for the year.
L-3 plans to grow these numbers in three phases. Phase 1, beginning in 2018, will focus on divesting low-margin businesses, "integrating" higher-margin businesses, and expanding profit margins.
And aerospace systems will bring up the rear, earning only 8.1% margins on $2.7 billion in sales. These sales will trend downward as L-3 de-emphasizes this less-profitable sector. In particular, L-3 plans to divest its Vertex Aerospace business, which does aircraft maintenance work for NASA and the U.S. Navy, among others, by the middle of next year.
Much as I'd like to see L-3 succeed in becoming America's "6th Prime" defense contractor (because we really could use some more competition in the defense space), these prices simply seem too rich. Growth of 5% to 6% just isn't fast enough, in my view, to justify paying a 20-plus multiple to earnings or free cash flow.
Despite RBC's endorsement, I'm staying away from L-3 Technologies stock.