Defense sector stocks have historically been recession-proof, but these defensive stocks are highly vulnerable to changes in the political environment.
L-3 Communications Holdings (LLL) is a prime systems contractor providing aircraft modernization and maintenance. L-3 is among a group of defense contractors engaged in the provision of command, control, communications, intelligence, surveillance and reconnaissance systems to the Defense Department and the Department of Homeland Security.
The company has enjoyed record revenues and earnings for the past several years as the DOD budget has increased as a percentage of the overall budget since 9/11.The war in Iraq has relied heavily on the advanced systems developed and manufactured at L-3.
The anticipated intensification of the United States wartime activity in Afghanistan will add to the company’s revenues, as the terrain in the country will require more high tech solutions to track Taliban activity.
What Will Happen to Defense Spending?
The defense technology and aerospace sectors will likely be under some stress as the Obama administration searches for ways to fund the economic stimulus and other initiatives during the next 4 years. It should be noted, however, that the ability to slow the behemoth in the near term will be limited.
Defense spending on systems procurement for 2009 and 2012 is essentially committed. Many of those commitments extend into 2011, making 2012 the earliest date by which any major reductions in systems will be realized at the Pentagon.
Defense Stocks Trading at Low Multiples
While L-3 and the company’s competitors are seeing strong revenues and earnings the last five years, Defense sector stocks in those companies are currently trading at multiples and yields which should appeal to investors.
Lockheed Martin (LMT), General Dynamics (GD), Raytheon (RTN), Northrop Grumman (NOC) and L-3 Communications are all trading at multiples well below 10 based on the companies forecasted earnings for the year.
L-3 Communications is the smallest of the group, with a market cap of $6 billion. Forecasted earnings per share by the company, however, are at the top of the group at $7.12 to$7.32 per share. At the current price of just under $67 per share, L-3 is trading at 8.8 times projected 2009 earnings and should be attractive to investors with an appetite for exposure to the defense industry.
The company has a strong balance sheet which positions L-3 well for growth through acquisitions. A current ratio of 1.9 and a long term debt to equity ratio of .77 are among the best in the sector.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
