Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put L-3 Communications Holdings Inc. stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks.
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, L-3 Communications has a trailing twelve months PE ratio of 20.73, as you can see in the chart below:
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This level actually compares somewhat unfavorably with the market at large, as the PE for the S&P 500 stands at about 20.36. If we focus on the long-term PE trend, L-3 Communications’ current PE level puts it almost on par with its midpoint over the past five years.
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Further, the stock’s PE also compares unfavorably with the Zacks classified Electronics-Military System industry’s trailing twelve months PE ratio, which stands at 20.67. At the very least, this indicates that the stock is slightly overvalued right now, compared to its peers.
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We should also point out that L-3 Communications has a forward PE ratio (price relative to this year’s earnings) of 19.72 so it is fair to say that a slightly more value-oriented path may be ahead for the stock in the near term.
P/S Ratio
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, L-3 Communications has a P/S ratio of about 1.28. This is considerably lower than the S&P 500 average, which comes in at 3.09 right now.
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If anything, L-3 Communications is towards the higher end of its range in the time period from a P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.
P/CF Ratio
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business.This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, L-3 Communications’ P/CF ratio of 13.83 is lower than the Zacks classified Electronics-Military System industry average of 19.43, which indicates that the stock is undervalued in this respect.
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Broad Value Outlook
In aggregate, L-3 Communications currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes L-3 Communications a good choice for value investors, and some of its other key metrics make this pretty clear too.
For example, its P/CF ratio (another great indicator of value) comes in at 9.49, which is better than the industry average of 9.86. Clearly, LLL is a good choice on the value front from multiple angles.
What About the Stock Overall?
Though L-3 Communications might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘B’ and a Momentum score of ‘C’. This gives LLL a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen one upward estimate revision in the past sixty days compared to two downward, while the full year estimate has seen two upward revisions in the same time frame.
As a result, the current quarter consensus estimate has dropped by 5.2% in the past two months, while the full year estimate has inched 2.5% higher. You can see the consensus estimate trend and recent price action for the stock in the chart below:
L-3 Communications Holdings, Inc. Price and Consensus
This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and indicates that while the stock’s growth story might be good over the long term, analysts have some apprehensions about the stock in the immediate future.
Bottom Line
L-3 Communications is an inspired choice for value investors, as it is hard to beat its good lineup of statistics on this front. Moreover, a strong industry rank (Top 13% out of more than 250 industries) further supports the growth potential of the stock. In fact, over the past one year, the Zacks Electronics-Military System industry has outperformed the broader market, as you can see below:
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However with a Zacks Rank #3, it is hard to get too excited about this company overall. So, value investors might want to wait for analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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Image: Bigstock
L-3 Communications: Should Value Investors Pick this Stock?
Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
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One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put L-3 Communications Holdings Inc. stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks.
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, L-3 Communications has a trailing twelve months PE ratio of 20.73, as you can see in the chart below:
This level actually compares somewhat unfavorably with the market at large, as the PE for the S&P 500 stands at about 20.36. If we focus on the long-term PE trend, L-3 Communications’ current PE level puts it almost on par with its midpoint over the past five years.
Further, the stock’s PE also compares unfavorably with the Zacks classified Electronics-Military System industry’s trailing twelve months PE ratio, which stands at 20.67. At the very least, this indicates that the stock is slightly overvalued right now, compared to its peers.
We should also point out that L-3 Communications has a forward PE ratio (price relative to this year’s earnings) of 19.72 so it is fair to say that a slightly more value-oriented path may be ahead for the stock in the near term.
P/S Ratio
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, L-3 Communications has a P/S ratio of about 1.28. This is considerably lower than the S&P 500 average, which comes in at 3.09 right now.
If anything, L-3 Communications is towards the higher end of its range in the time period from a P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.
P/CF Ratio
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business.This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, L-3 Communications’ P/CF ratio of 13.83 is lower than the Zacks classified Electronics-Military System industry average of 19.43, which indicates that the stock is undervalued in this respect.
Broad Value Outlook
In aggregate, L-3 Communications currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes L-3 Communications a good choice for value investors, and some of its other key metrics make this pretty clear too.
For example, its P/CF ratio (another great indicator of value) comes in at 9.49, which is better than the industry average of 9.86. Clearly, LLL is a good choice on the value front from multiple angles.
What About the Stock Overall?
Though L-3 Communications might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘B’ and a Momentum score of ‘C’. This gives LLL a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen one upward estimate revision in the past sixty days compared to two downward, while the full year estimate has seen two upward revisions in the same time frame.
As a result, the current quarter consensus estimate has dropped by 5.2% in the past two months, while the full year estimate has inched 2.5% higher. You can see the consensus estimate trend and recent price action for the stock in the chart below:
L-3 Communications Holdings, Inc. Price and Consensus
L-3 Communications Holdings, Inc. Price and Consensus | L-3 Communications Holdings, Inc. Quote
This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and indicates that while the stock’s growth story might be good over the long term, analysts have some apprehensions about the stock in the immediate future.
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Bottom Line
L-3 Communications is an inspired choice for value investors, as it is hard to beat its good lineup of statistics on this front. Moreover, a strong industry rank (Top 13% out of more than 250 industries) further supports the growth potential of the stock. In fact, over the past one year, the Zacks Electronics-Military System industry has outperformed the broader market, as you can see below:
However with a Zacks Rank #3, it is hard to get too excited about this company overall. So, value investors might want to wait for analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
More Stock News: 8 Companies Verge on Apple-Like Run
Did you miss Apple's 9X stock explosion after they launched their iPhone in 2007? Now 2017 looks to be a pivotal year to get in on another emerging technology expected to rock the market. Demand could soar from almost nothing to $42 billion by 2025. Reports suggest it could save 10 million lives per decade which could in turn save $200 billion in U.S. healthcare costs.
A bonus Zacks Special Report names this breakthrough and the 8 best stocks to exploit it. Like Apple in 2007, these companies are already strong and coiling for potential mega-gains. Click to see them right now >>