Wednesday, Credit Suisse downgraded L-3 Communications Holdings Inc. (LLL) shares to Neutral from Outperform and lowered its price target to $82 from $86.
Analyst Spingarn said that he has increased concerns over the impact to LLL of an Iraq pull-out, ~9% war exposed, as well as worries over several weakening areas in the product portfolio. The analyst does not think there is read-through to other stocks in our universe at this time, but noted that he sees most pure-play defense large-caps largely range-bound given continued budget uncertainties in advance of the FY-11-15 budget release in February.
The analyst sees portfolio weakness at LLL in key areas such as the CECOM SSES contract, commercial aviation and ships, and Bradley support. As well, even if JOG is recaptured, revenue growth seems stuck in the low/mid-single digits, major program catalysts do not seem to exist, and comps at the C3ISR growth engine are getting more difficult. As well, US withdrawal from Iraq seems to be proceeding apace, a negative for LLL.
The analyst does think there may modest upside to shares from here, but not enough to warrant an Outperform rating. An Obama decision on increased troops for Afghanistan could act as a share catalyst, and the strong FCF yield (~14%) should act as a support. Other potential catalysts include JOG recapture, further helo support growth, and the Helix contract.
Currently, LLL is up $0.56 or 0.76% and trading at $74.50.
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