L-3 Communications (LLL) Named Top Defense Pick at JPMorgan; Rating Upgraded to 'Overweight'
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(Updated - August 25, 2016 9:22 AM EDT)
JPMorgan upgraded L-3 Communications (NYSE: LLL) from Neutral to Overweight with a price target of $182.00 (from $158.00). Analyst Seth M. Seifman said the stock stands out for upside potential given FCF growth and a reasonable valuation. The stock is JPMorgan's top defense pick.
"The 5% FCF CAGR we project for LLL through 2020 is second best among our defense stocks and yet its ~13x multiple on 2017 FCF is lowest in the group," said Seifman.
"Moreover, LLL’s FCF yield of 7.8% on 2017 is low relative to the market (5.4%) and to other industrial stocks (typically ~6%). LLL’s ~130% cash conversion ratio makes it more expensive on P/E and so we only assume a FCF yield just above 7% for our target. Operationally, we assume 2% annual organic growth and 100+ bps of cumulative margin expansion through 2018 to a reasonable 11%+. Moreover, unlike LMT, NOC, and RTN, pension is a cash tailwind through decade-end. LLL’s turnaround is already underway and the stock has returned 25% YTD vs mid-teens appreciation for our other defense stocks. But with further FCF growth and a reasonable valuation we still see nice upside," added the analyst.
Shares of L-3 Communications closed at $146.78 yesterday.
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