Citi Initiates L-3 Communications At Buy, Expects Sales & Margins To Rebound

Citi’s Jason Gursky believes L-3 Communications Holdings, Inc. (NYSE: LLL) is well positioned to see a rebound in its below-average sales growth and margins, given the improving defense environment.

Gursky initiated coverage of the company with a Buy rating and price target of $174.

“Our price target assumes a discount vs. larger peers given the show-me nature of the story, which could create further upside if the strengthened management team is able to deliver on its targets,” the analyst mentioned.

Gursky noted that L-3 Communications has been deploying capital to drive earnings growth via repo and M&A.

Driving Earnings

On the other hand, the stabilizing defense market, which accounts for 70 percent of the company’s sales, as well as the strong commercial aviation demand indicate that sales would bottom in 2016.

“All three of the company’s segments should return to growth in 2017E via a combination of new work & easing international comps,” Gursky believes, expecting growth to reach 3.5 percent into 2018.

The analyst also believes these improving trends would help L-3 Communications to narrow some of its historical valuation discount to peers, who seem poised to achieve similar growth.

“The company is targeting sustainable low-teen margins over time which, if achieved, should go a long way in improving the valuation outlook for the company as peers already perform at those levels,” Gursky pointed out.

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