Wednesday’s Top Upgrades (and Downgrades): SAIC, Inc. (SAI), Analog Devices, Inc. (ADI) and More

How low can L-3 go?
RBC’s second defense downgrade of the day, L-3 Communications, is a bit trickier. On one hand, at a P/E ratio of 9.3, the stock doesn’t look all that expensive. On the other hand, the fact that most analysts think L-3 will show no earnings growth at all over the next five years — and will actually post earnings declines — certainly doesn’t argue in L-3’s favor. Plus, when you factor the company’s $3.3 billion net-debt load into the equation, the company’s actually trading for an enterprise value closer to 13.4 times earnings.

Even with a 2.8% dividend yield, that seems a steep price to pay for zero growth.

All that being said, I’m more optimistic about L-3’s chances than I am about SAIC. Why? Because if SAIC generates strong free cash flow, L-3 is simply a cash-producing powerhouse. Over the past year, L-3’s generated nearly $1.1 billion in real cash profits — 35% better than reported earnings.

Now, I won’t say the stock’s a “buy.” For that, I’d need to see some actual growth prospects in L-3’s future. But still, valued on its free cash flow, and even factoring debt into the picture, L-3 sells for a multiple of less than 10. That’s probably cheap enough to justify holding the stock, collecting the dividend checks, and waiting for better days in the defense industry.

The article Wednesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of L-3 Communications Holdings.

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