Dont panic: Harris still growing strong


  Recent Price
  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$66.94 - $44.11

Harris ($52; NYSE: HRS) shares have taken a hit in recent months. In May, the company reportedly put itself up for sale, sparking a rally in the shares. But in June, Harris shares fell after the company said it was not planning a merger and expressed confidence in its prospects. In July, the company declared earnings below Wall Street expectations, and the shares fell again.

While some slowdown in growth is expected — annualized per-share-profit growth of 38% over the last five years is not sustainable — Harris seems capable of long-term annual profit growth of at least 15%. Consensus estimates project per-share-profit growth of 21% for fiscal 2009 ending June and a conservative 10% for fiscal 2010. Harris, a Focus List Buy and Long-Term Buy, seems capable of exceeding expectations over the next several years.

Business breakdown
Harris makes high-tech communications systems for government and commercial customers, operating in three business segments. Military spending remains solid, and a diversified business mix should help Harris weather downturns in any one area.

The defense-communications segment, which includes the high-growth radio business, provides secure wireless communications systems. The product lineup includes tactical military radios, a chief growth driver in recent quarters. In the year ended June, defense-communications revenue rose 19% while operating income jumped 23%.

Harris sees strong ongoing demand for tactical radios in both the U.S. and international markets, as militaries modernize and expand, requiring better communication between allied forces. Orders for the defense-communications business reached about $1.7 billion in the year ended June, while the backlog rose to $1 billion at the end of June, 23% above year-earlier levels.

The government-communications unit makes communications and information-processing systems for government agencies. Sales increased 32% in the year ended June, bolstered by a large acquisition.

In June 2007, Harris paid $400 million for Multimax, which provides computer systems for such customers as the Department of Homeland Security. The purchase significantly increased the segment’s scale and should provide plenty of cross-selling opportunities in coming years.

Harris’ broadcast segment serves the commercial television and radio markets. The unit has been Harris’ weakest performer in recent years, but sales of transmission equipment are on the rise as U.S. broadcasters convert to digital and high-definition systems.

While per-share profits rose 34% in the June quarter, results fell short of consensus estimates, and Harris shares have dipped 22% from May highs. Core businesses performed well, and most of the shortfall can be traced to weak results and accounting errors at 56%-owned subsidiary Harris Stratex Networks ($9; NASDAQ: HSTX).

Despite the profit disappointment, the consensus has not declined. At 13 times estimated year-ahead earnings of $4.10 per share, Harris trades below its five-year average forward P/E of 15 and seems cheap relative to its growth potential. An annual report for Harris Corp. is available at 1025 W. NASA Blvd., Melbourne, FL 32919; (321) 727-9100;

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