L-3 Communications Holdings Inc. (LLL) received a major setback after the U.S. government suspended its Special Support Programs Division, formerly known as L-3 Joint Operations Group, from receiving new government orders earlier this month. The U.S. Defense department re-awarded the $5 billion Special Operations Forces Support Activity (SOFSA) contract with the U.S. Special Operations Command (SOCOM) to arch-rival Lockheed Martin Corporation (LMT).
The contract was previously awarded in March 2009 to Lockheed Martin, but was terminated in June 2009 when L-3 Communications Holdings protested that they are performing the same work for the command under an earlier contract. For L-3, which now shares the platform with Boeing Company (BA), another company who failed to win the SOFSA contract, it’s like coming a full circle.
L-3 Communications’ problems do not end here. Its Special Support Programs Division is undergoing investigation over allegations of using a highly sensitive government computer network to collect business intelligence by copying specific emails without consent and keeping them on a company monitored database.
Sales from the SOFSA contract generated approximately $455 million for L-3 Communications in 2009 and historically accounted for 3% of its top line. The company is already reeling under lower revenues expected in 2010 year over year from Linguist, CECOM task orders and the Bradley Fighting Vehicle programs.
L-3 Communications estimates that the loss of the SOFSA contract will reduce its total revenue for 2010 by $150 million and reduce the 2010 earnings by 4 cents per share. Earlier in its first quarter earnings call, the company gave a revenue guidance of $16.2 billion–$16.3 billion and the EPS guidance range of $8.13–$8.33 for fiscal 2010.
L-3 Communications is currently trading at a discount to both its peer group and the S&P 500, based on forward earnings estimates. We currently have a market Neutral recommendation on the Zacks #3 Rank (‘hold’) stock.
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