Holders Wait to Cash In on ‘New’ Litton
If Southern California’s future depends partly on how well defense firms here find other work, Litton Industries is an encouraging symbol.
Long known primarily as a defense electronics and shipbuilding firm, Beverly Hills-based Litton has quietly built itself into a major player in two promising global businesses: oil-field services and factory automation.
In fact, Litton’s transformation has been so rapid that its Pentagon-dependent electronics division produced just 36.5% of total revenue in the fiscal year ended last July, down from 51.5% in 1987.
With $5.2 billion in annual revenue, Litton now is the third-largest manufacturing firm headquartered in the Southland, excluding oil companies. About 5,000 of the company’s total 52,000 workers are based here. Yet Litton has historically been low key about its image--perhaps stemming partly from the stinging Pentagon fraud case the company settled in 1986, paying a then-record $15 million in fines.
There may also be a more fundamental reason for the company’s relative quiescence: Despite Litton’s impressive push into new businesses, its shareholders have yet to see much of a payoff.
The company’s stock closed at $86.125 Thursday on the New York Stock Exchange. Since 1986, the shares have traded mostly between $65 and $90, except for a brief spike to $108.25 in 1987. And because Litton pays no dividends, many shareholders have earned virtually nothing on their investment since 1986.
That frustration was expressed at the company’s annual meeting in Los Angeles on Thursday. John Cantley, who said he has owned the stock for 20 years, was the only shareholder to question management at the meeting. Noting that Litton’s stock is only slightly higher today than its 1980 peak of $83.75, Cantley said, “It appears that this is no longer a growth company, but a shrinking company.”
The truth, say analysts who follow Litton, is that management has done a surprisingly good job redirecting Litton in a world of declining defense spending. The firm intelligently bought into oil-field services and factory automation in the late 1980s, while aggressively cutting costs in its defense lines to keep profits up.
At the same time, Litton has husbanded cash and bought back nearly 24% of its shares since 1987.
The end result of those efforts is that the company has built “wealth” for shareholders in the form of higher book value per share: Book value, the net value of the firm’s assets, now is $58 a share, up from $34 a share in 1985.
Problem is, that wealth hasn’t yet translated into steady earnings growth. Litton’s operating earnings have totaled about $450 million for each of the last three years. Even with the share buyback, net earnings per share have inched up only from $7.05 to $7.50 in that time. Hence, Wall Street couldn’t get very excited about Litton or the stock.
Byron Callan, analyst at Prudential Securities in New York, says the Litton story to date has simply been “a horse race between declining defense businesses and growth in new businesses.”
Now, some Wall Streeters believe that the race is beginning to turn in Litton’s favor. For the first quarter ended Oct. 31, Litton reported a 13% jump in operating profit on a 10% rise in revenue, surprising analysts. Merrill Lynch & Co.’s Carol Neves, one of the company’s biggest fans, believes that Litton is capable of 15% annual earnings growth in the years ahead. And if that’s doable, she suggests, the stock could sell for as much as $118 in the next year, up 35% from the current price.
Why believe the Litton story can only get better? It’s true that in the no-growth defense business, electronics (36.5% of revenue) could remain a drag on Litton, even though the company’s plane and ship navigational systems, radar systems and surveillance devices are highly regarded worldwide. But it’s important to note that the business still is profitable, not a money-loser.
Meanwhile, many investors may not realize that Litton’s other major defense line--building the Aegis destroyer and other ships for the Navy--is actually a cash cow. The marine unit produced 23.7% of Litton’s revenue last year, but 29.4% of operating profit.
What’s more, the marine division’s backlog of more than $4 billion will keep Litton’s Mississippi shipyard busy through 1995, the company notes.
And in the meantime, Litton is concentrating new investment in its two non-defense businesses:
* The oil-field services division, now 21.2% of revenue versus just 8.4% in 1987, is roaring. In the first quarter alone, operating profits surged 43% from a year ago. Litton is a leader in providing seismic technology and other services to help oil companies find oil, improve well flows and log data. Despite a weak oil market, exploration is booming worldwide, and Litton’s technology is cutting-edge, analysts say.
* The industrial automation unit, 18.6% of revenue, designs and installs factory and warehouse assembly lines and materials-handling systems. Though business is down because important customers, such as auto companies, are delaying capital expenditures in the economic slump, Litton sees a big future here. Last spring, Litton bought Intermec, a leader in computer bar-coding of industrial goods. By integrating bar codes in the assembly and warehousing of goods, Litton can sell a client a complete system for rapidly moving goods from production to market.
If Litton’s normally tight-lipped management is lauded for its business acumen, however, shareholders such as John Cantley still worry that the company doesn’t care much about including their interests in the corporate game plan.
Indeed, management has shown a puzzling reluctance to make the stock more accessible to investors. Because insurance giant Unitrin Inc. owns 32% of Litton’s 20 million shares, relatively little of the stock trades regularly. That could be helped if Litton’s board would just split the price of the shares to increase the number outstanding.
In addition, Litton certainly has the wherewithal to pay some kind of regular cash dividend, to give shareholders something back while they wait for the company’s earnings growth to accelerate.
At the annual meeting Thursday, Litton Chairman Orion Hoch showed no interest in the dividend idea, saying he preferred stock buybacks. Asked about a stock split, though, he said: “It’s something to consider. . . . We hear shareholders.”
Litton: Ready to Bust Out?
Litton’s earnings growth anb its stock have been unexciting since 1987, but management believes it will change that in 1992.
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Source: Litton Industrials
