Exelis' Future Looks Less Than Excellent

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Defense contractor Exelis reported a mixed bag of earnings numbers Friday, leaving investors somewhat unhappy -- shares being down slightly in post-earnings trading. Mostly, though, the news was just confusing.

The good news
Financial results at Exelis exceeded expectations for both revenues and earnings, with the company reporting $0.41 per diluted share in profit on sales of $1.25 billion. Guidance for the year ahead likewise looks good, with management doubling down on past promises to earn about $1.50 per share on $5 billion or more in revenues. Here, too, the numbers Exelis is projecting exceed analyst expectations for the year (which average $1.49 in profits, $4.98 billion in revenues).

Helping to achieve these results, Exelis noted that despite falling revenues in Q2, the company recorded an increase in orders from its defense department customers. Having taken in $1.4 billion in new orders in Q2 gives the company about a 1.1 book-to-bill ratio and suggests that revenues will rise in future quarters.

The bad news
Strangely, however, this is not what Exelis is promising. To the contrary, guidance for the year ahead, while better than Wall Street was expecting, suggest we could see revenues shrink 9% for the year as a whole (relative to 2012 performance), with profits falling perhaps 14%. Management's projection of $225 million (or more) in free cash flow for the year would likewise represent about a 15% decline in cash profit for the company.

The valuation
This all poses investors a serious conundrum. On one hand, Exelis shares don't look at all expensive at a 9.3-times earnings valuation, and costing just 6.5 times the $434 million in free cash flow produced over the past 12 months. On the other hand, though, in as little as six months, this same stock could look a whole lot more expensive at 10 times (projected) earnings, and 12.6 times (also projected) free cash flow.

Paired with expectations of continued (6% annual) declines in earnings over the course of the next five years, these shares may be a whole lot more expensive than they look today. Caveat investor.

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The article Exelis' Future Looks Less Than Excellent originally appeared on Fool.com.

Fool contributor Rich Smith and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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