L-3 Communications Holdings (LLL) is Close to Resistance

November 07, 2013, 09:09 am ET, BY Neal- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

L-3 Communications Holdings, Inc. (NYSE:LLL) has won multiple national and international government contracts recently.  The latest, L-3 Communications announced that its Warrior Systems-ALST business has been awarded a contract to deliver Ground Laser Target Designators to the Republic of Korea. The initial contract value is $30 million with product delivery beginning in mid-2014.  The stock is up 31% YTD and trading near five-year highs.  Is LLL a buy, sell or hold at current levels?

L-3 Communications Holdings, Inc. through its subsidiary, L-3 Communications Corporation, provides command, control, communications, intelligence, surveillance, and reconnaissance (C3ISR) systems; aircraft modernization and maintenance; and national security solutions in the United States and internationally.  L-3 Communications Holdings' competitors include AAR Corp. (NYSE:AIR) and Cubic Corporation (NYSE:CUB).  

Over 75% of the company’s revenues were derived from US Department of Defense and Government Agencies, and International Sales made up 19% of revenues. The rest is generated from sales to US corporate customers. The company has managed to increase dividends for 9 years in a row now, and the past five years, distributions rose by 15.30% a year.  Based on the real-time trading report for LLL, published by Stock Traders Daily, the stock is testing long-term resistance. 

Profits have been growing largely in part to a lower effective corporate income tax rate.  The company’s effective income tax rate declined in 2013 from a year ago and it claimed a $14 million government research and Development tax credit.  Without those two factors, the company’s net profit would have actually declined. 

However, contracts have continued to roll in for the company.  L-3 Communications recently announced that its Warrior Systems-ALST business has been awarded a contract to deliver state of the art Ground Laser Target Designators to the Republic of Korea.  L-3 Warrior Systems is a world leader in the development and production of advanced night vision and electro-optical systems and components.

In mid August, L-3 announced that its MAS division has been awarded a contract from the Government of Canada to provide complete in-service support services for the country's fleet of CC-150 aircraft. The five-year contract, with two five-year option periods, has a total potential value of $669 million ($683 million Canadian).   As the prime contractor, L-3 MAS is responsible for overall program management, materiel management, engineering support, flightline maintenance, heavy maintenance, and component maintenance, repair and overhaul services.

In addition, two separate L-3 Communications businesses, Communication Systems-West and its L-3 Coleman Aerospace, won a pair of defense contracts totaling more than $80 million in value:

Communication Systems-West was awarded a $7.3 million option exercise instructing it to supply the Royal Australian Navy with 13 Common Data Link Hawklink AN/ARQ-59 radio terminal sets under a foreign military sales contract.  Delivery is due September 2014.

L-3 Coleman Aerospace won a $73.4 million contract to develop and manufacture medium-range ballistic missile targets, and to provide integrated logistics support through the time of their use as targets for anti-missile defense system testing. This contract is expected to run through September 2018.

The stock is up 33% in the last year, up 43% over a two-year period and trading at five-year highs.  Despite all the new contracts the company has received, there have been 120,085 shares sold by insiders during the last 30 days.  Earnings are over and the new contracts could be already baked into the stock price.  Smart money may start to take profits off the table, as the stock is sitting very close to long-term resistance.  According to rule, we are sellers at resistance, and as long as the stock remains below resistance, we expect lower levels and a test of support. Based on the real-time trading report published by Stock Traders Daily, LLL is a sell/short at long-term resistance, with risk controls in place if resistance breaks higher.

Support and Resistance Plot Chart for

Real Time Updates for Repeat Institutional Readers:

Factset: Request User/Pass

Bloomberg, Reuters, Refinitiv, Zacks, or IB users: Access Here.