Defense Cuts Won't Tune Harris Out

3/30/2009


 

  Recent Price
$28
  Dividend
$0.80
  Yield

2.9%

  P/E Ratio
8
  Shares (millions)
133
  Long-Term Debt as % of Capital
26%
  52-Week Price Range
$66.71 - $27.56

Harris ($28; HRS) controls about 37% of the global market for tactical radios used by ground troops, a market that has been growing at double-digit rates.

With budget pressures intensifying and operations in Iraq winding down, the stock has slumped on concerns regarding cuts in military spending. But Harris is better positioned than most defense contractors to withstand cutbacks, and the company has its fingers in other pies. The government communications division, which develops networks for government agencies, is enjoying strong growth. The broadcast division is struggling in the U.S. but posting decent gains overseas, and a new venture in electronic medical records has a potentially big payoff.

New contracts for tactical radios and technology services should propel near-term growth. For fiscal 2009 ending June, Harris expects per-share profits to be up 17% to 20% on sales growth of at least 8%, excluding discontinued operations. For fiscal 2010, consensus estimates project 7% per-share profit growth on a 4% sales gain. Harris, modestly valued at less than eight times trailing earnings, is a Focus List Buy and a Long-Term Buy.

Business mix
U.S. and foreign governments account for about half of Harris’ sales. The two biggest segments, RF Communications and Government Communications, each generated 37% of sales in fiscal 2008. Each grew sales at least 20% in the December quarter.

RF Communications makes tactical radios and encryption products. International sales have accelerated in recent quarters, and growth should continue as foreign militaries increase their emphasis on communications.

Revenue from broadcasting equipment (12% of sales) was roughly flat in the December quarter, though operating profit margins improved. Economic weakness could limit U.S. broadcast growth this year, but many overseas clients benefit from government funding and face mandated schedules for digital conversion.

The rest of Harris’ sales come from its 56% stake in Harris Stratex Networks ($4; HSTX), which provides products and services for wireless networking. Harris plans to sell or spin off the stake.

Outlook
No Harris radio orders were canceled in the December quarter, though one big international order and several smaller U.S. orders were delayed until later this calendar year. Further delays are possible, but cuts in defense spending are likely to target big-budget items more than communications equipment.

A new administration facing huge budget deficits will likely adopt new spending habits. President Obama’s defense budget for 2010 calls for a 1.5% increase to $663.7 billion, but it calls for a reassessment of all weapons programs and 8% less spending on wars in Iraq and Afghanistan.

As the government tries to control spending, Harris’ Falcon III tactical radio could look more attractive than pricier rivals. In the December quarter, the U.S. military placed multiple orders for Falcon III radios for use in vehicles destined for Afghanistan.

Consensus estimates project per-share-profit growth of 23% for the March quarter and 7% for the June quarter. An annual report for Harris Corp. is available at 1025 W. NASA Blvd., Melbourne, FL 32919; (321) 727-9100; www.harris.com.

HARRIS
 
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Dec '08 $1.08 vs. $0.87 + 16% $46.02 -

$27.56

13 - 8
Sep '08 0.88 vs. 0.76 + 11% 55.00 - 42.00 16 - 12
Jun '08 0.95 vs. 0.71 + 19% 66.71 - 48.35 21 - 15
Mar '08 0.81 vs.

0.72

+ 24% 62.55 - 44.11 20 - 14
           
Year
(Dec.)

Sales
 (Mil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $5.31 $3.39 $0.70 $66.94
-
$44.11 20 - 13
2007 $4.24 $2.80 $0.52 56.50
-
37.08 20 - 13
2006 $3.47 $2.22 $0.38 49.78
-
30.91 22 - 14
2005 $3.00 $1.46 $0.28 35.00
-
21.60 24 - 15
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
87 80 66 88 63 51 51

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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