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Exelis (XLS) 2011 earnings

March 5, 2012

Exelis reported 4th quarter and full year 2011 earnings last Friday. Full year earnings were $1.99 a share on a fully diluted basis, down about 17% over comparable 2010 earnings. Guidance for 2012 was a further decline in per-share earnings of 7%-10%, to $1.80-$1.86 per share. I expected both last year’s earnings decline as well as this year’s; Management had prepared us for it in their form 10. Shares, even after the recent bump on the earning’s news, trade for around 6x forward earnings estimates, still inexpensive in my view. I’d rather be holding a defense stock at 6x earnings even with the bleak outlook for the defense industry than a consumer retail operation like Home Depot at 19x earnings; possible future weakness in the economy leaves the latter highly exposed to investor disappointment. Outlooks, after all, can change in a heartbeat. I think Exelis management is conservative and we might have some positive surprises in 2012, which could bump my holdings up another 20-30-40%, hopefully to our target price (but not until they qualify for long-term capital gains treatment, my personal bugaboo).

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