Company Reports

After reviewing L3Harris Technologies' first-quarter 2024 results on April 26, we have increased our fair value estimate for the narrow-moat defense contractor to $234 from $230, essentially for the time value of money. First-quarter revenue and profits came in close enough to our forecast that we did not alter our assumptions.

L3Harris Technologies is the sixth-largest US defense contractor by sales. It formed in 2019 from the merger of L-3 Technologies, a sensormaker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger was an assumption that additional scale would primarily generate cost synergies and eventually, the firms could produce meaningful revenue synergies. With the recent addition of ViaSat's tactical data link business and most recently the $4.7 billion acquisition of Aerojet Rocketdyne, L3Harris has opportunistically vaulted its strategy forward into becoming a more well-rounded defense prime contractor, adding munitions, space exploration, and hypersonic missile components and capabilities to its very radio- and communications-heavy base. That said, Aerojet supplies components to many other defense contractors, which isn't likely to change, and competes with the space segment of Northrop Grumman. We think it will take time for meaningful revenue synergies that weren't already in the backlog for L3Harris, ViaSat, or Aerojet to materialize.

We are reviewing President Joe Biden's fiscal 2025 defense budget request, released March 11, which is limited by a compromise struck in mid-2023 to avoid government shutdown at only a 1% increase over the 2024 sum.

After L3Harris Technologies' release of 2023 results on Jan. 25, we are maintaining our fair value estimate for the narrow-moat defense contractor at $230 per share. There is still some noise in the system as the firm sorts through acquired businesses, writes down impairments, and endeavors to restructure some of its business units to be more efficient. Yet, we see a credible path to continued single-digit revenue growth and double-digit adjusted operating margins in each of the four principal operating segments.

With L3Harris' third-quarter results in hand, we have raised our fair value estimate for the narrow-moat defense contractor by just over 1% to $230 to account for the time value of money. Year to date, the company reported steady growth across its segments, with segment operating margins over 14%, which bodes well for future quarters if the company can fulfill its multiple post-merger plans to increase margins further.

L3Harris Technologies is the sixth-largest U.S. defense contractor by sales (13th globally, according to the Stockholm International Peace Research Institute). It formed in 2019 from the merger of L-3 Technologies, a sensormaker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger was an assumption that additional scale would primarily generate cost synergies and eventually, the firms could produce meaningful revenue synergies. With the recent addition of ViaSat's tactical data link business and most recently the $4.7 billion acquisition of Aerojet Rocketdyne, L3Harris has opportunistically vaulted its strategy forward into becoming a more well-rounded defense prime contractor, adding munitions, space exploration, and hypersonic missile components and capabilities to its very radio- and communications-heavy base. That said, Aerojet supplies components to many other defense contractors, which isn't likely to change, and competes with the space segment of Northrop Grumman. We think it will take time for meaningful revenue synergies that weren't already in the backlog for L3Harris, ViaSat, or Aerojet to materialize.

We see Oct. 9, 2023's sudden price increase in defense stocks as an overblown and simplistic reaction to the outbreak of war in Israel and Gaza. As we have pointed out before, the dots between military combat and the profit of a defense contractor do not connect nearly as directly as they seem to in the investing public's imagination. We will not alter our ratings or valuations of defense contractors in light of this news, and we believe long term development and resupply of missile defense technology are already baked sufficiently into our forecasts.

We are initiating coverage of L3Harris with a narrow moat rating and $227 per share fair value estimate. The firm has completed the acquisition of ViaSat's data link networking business, as well as the more transformative Aerojet Rocketdyne, which supplies rocket motors and munitions to the defense and aerospace industry. The company's proprietary research and development and a stated pause in sizable acquisitions present the opportunity for it to achieve industry-leading operating margins, as it ingests those deals over time.

L3Harris Technologies is the sixth-largest U.S. defense contractor by sales (13th globally, according to the Stockholm International Peace Research Institute). It formed in 2019 from the merger of L-3 Technologies, a sensormaker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger was an assumption that additional scale would primarily generate cost synergies and eventually, the firms could produce meaningful revenue synergies. With the recent addition of ViaSat's tactical data link business and most recently the $4.7 billion acquisition of Aerojet Rocketdyne, L3Harris has opportunistically vaulted its strategy forward into becoming a more well-rounded defense prime contractor, adding munitions, space exploration, and hypersonic missile components and capabilities to its very radio- and communications-heavy base. That said, Aerojet supplies components to many other defense contractors, which isn't likely to change, and competes with the space segment of Northrop Grumman. We think it will take time for meaningful revenue synergies that weren't already in the backlog for L3Harris, ViaSat, or Aerojet to materialize.

We are dropping coverage of L3Harris Technologies. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Narrow-moat-rated L3Harris Technologies posted a 6.0% organic revenue decline as supply chain challenges limited sales. Sales of $4.1 billion missed FactSet consensus by 2.1%, but non-GAAP earnings per share of $3.23 beat these estimates by 1.7%. After adjusting our model for second-quarter earnings, we are increasing our fair value estimate to $236 per share from $233 due to the time value of money.

Defense prime contractors are not born, they’re assembled. L3Harris Technologies, the sixth-largest defense prime by defense sales, was made from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies.

Narrow-moat-rated L3Harris posted a somewhat slow first quarter as the continuing resolution funding spending environment weighed on industrywide sales during the quarter. Sales of $4.1 billion missed FactSet consensus by 0.7%, but earnings per share of $3.12 beat these same estimates by 2.4%. After incorporating first-quarter earnings into our model, we are increasing our fair value estimate for L3Harris to $233 per share from $216 as we increase our top line estimates in the later years of our model to account for increased defense spending resulting from increased geopolitical tension.

Defense prime contractors are not born, they’re assembled. L3Harris Technologies, the sixth-largest defense prime by defense sales, was made from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies.

As the Russian military is conducting significant military operations throughout Ukraine, we believe it is worthwhile to reconsider the effects of the war on global defense budgets and the subsequent effects on defense prime contractor valuations. As of Feb. 28, the German Chancellor Olaf Scholz announced that Germany would increase defense spending from roughly 1.5% of GDP to over 2% of GDP and the Japanese Ministry of Defense announced in November that Japan’s fiscal 2022 defense budget would rise to about 1.14% of GDP, which would be the first time since the 1960s that Japanese defense spending exceeded 1% of GDP. Despite the increases in defense budgets, we are maintaining our valuations across our North American prime contractor coverage as we await news from Washington on defense spending for fiscal 2023. This noted, we would expect that the military operations will encourage more spending that would buoy the justified valuations of prime contractors, so we think the risks to our valuations skew to the upside. Valuation-wise, our preferred names within our defense prime coverage are Lockheed Martin and Huntington Ingalls.

Narrow-moat rated L3Harris Technologies reported mixed fourth-quarter results that featured both strong booking activity and supply chain-related constraints on production. Sales of $4.4 billion missed FactSet consensus by 3.0%, but earnings per share of $3.30 beat the same estimates by 1.1%. We are increasing our fair value estimate for L3Harris to $216 per share from $215, as the effects of Morningstar’s updated assumption that corporate tax increases will not happen were mostly offset by the effects of research and development tax credits becoming capitalized and amortized, rather than expensed.

Defense prime contractors are not born, they’re assembled. L3Harris Technologies, the sixth-largest defense prime by defense sales, was made from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies.

Defense prime contractors are not born, they’re assembled. L3Harris Technologies, the sixth-largest defense prime by defense sales, came about from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies.

Narrow-moat-rated L3Harris reported a strong third quarter as sales were limited by supply chain issues. That noted, the shorter-cycle prime is showing its portfolio is well aligned in the decelerating funding environment, as the organic backlog of about $21 billion is up 9% from last year and 4% year to date. Many peer defense contractors have had declining backlogs in 2021. Revenue of $4.2 billion missed FactSet consensus by 6.6% but non-GAAP EPS of $3.21 beat FactSet consensus by 0.8%. After incorporating third-quarter earnings into our model, we are increasing our fair value for L3Harris to $215 per share from $208 as we increase our medium-term margin outlook as L3Harris’ cost synergies are tracking ahead of our previous outlook, though this increase is partially offset by lower 2021 revenue.

Defense prime contractors do not emerge, they’re assembled. L3Harris Technologies, the sixth-largest defense prime by defense sales, came about from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies.