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Harris Received a Couple of Contracts to Boost Profitability

Victor Selva

Victor Selva

9 followers

Harris Corporation (HRS) is an international communications and information technology (IT) company. The company has three segments: government communications systems (35% of revenues in the second quarter of fiscal 2014), RF Communications (37% of revenues), which includes the tactical handheld radios), and integrated network solutions (30% of revenues), which includes information technology (IT) services, health care services and broadcast communications.

In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

One of Six Companies

The United States Air Force has awarded the Network-Centric Solutions-2 (NETCENTS-2) Application Services contract to the firm, enabling it to compete for a wide range of IT services projects.

Harris was one of six companies awarded the indefinite delivery/indefinite quantity (IDIQ) contract that has a total potential value of $960 million. This deal, as well as the Federal Aviation Administration s (FAA) NextGen Data Communications Program, for $150 million will boost earnings in the near future.

Global Tactical Advanced Communication Systems Contract

Harris has been selected as one of the 20 contractors to compete for work under the five-year, $10 billion Indefinite Delivery/Indefinite Quantity contract, which enables both defense and civilian federal agencies to quickly and cost-effectively procure a wide range of tactical communications products, systems and engineering services.

Divestiture of Non-Core Businesses

The company approved a plan to divest Broadcast Communications. The decision to divest resulted from a review of its business portfolio, which determined that Broadcast Communication was no longer aligned with the company’s long-term strategy. The lack of effective integration by the company and a market outlook that it was not promising, led Harris to believe that the business must go away to an affiliate of the Gores Group LLC for $225 million.

Share Repurchases

The board of directors decided to authorize a new $1 billion share buy-back program. This program is in addition to the existing program, which currently has a remaining authorization of about $62 million. The company plans to repurchase up to $200 million worth of shares in fiscal 2014.

Analyst Recommendation

The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral.” A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 10.56%, which is very similar to the one projected for the S&P 500. For investors looking for a better Zacks Rank, Juniper Networks Inc. (JNPR), Nokia Corporation (NOK) and ShoreTel Inc. (SHOR) could be better options to consider in the wireless equipment industry.

Relative Valuation, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 18.8x, trading at a discount compared to the industry mean. Earnings per share (EPS) haveslightly increased by 1.6% in the most recent quarter compared to the same quarter a year ago, $1.27 per share for the second quarter. In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance had an upward trend over the last two years.

1397680697587.png

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a clear sign of weakness within the company.

Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

HRS

Harris Corporation

7.24

NOK

Nokia Corporation

-39.11

SHORT

ShoreTel

-16.46

JNPR

Juniper

6.02

PCTI

PCTEL, Inc.

2.9

QCOM

Qualcomm, Inc.

18.99

VSAT

Viasat Inc.

-4.56

ARUN

Aruba Networks, Inc.

-6.64

The company has a current ratio of 7.24% which is higher than the ones registered by Nokia Corporation, ShoreTel, Juniper, PCTEL Inc. (PCTI), Viasat Inc. (VSAT) and Aruba Networks Inc. (ARUN). For investors looking for a higher ROE, Qualcomm Inc. (QCOM) is a better option.

Final Comment

Harris aims to achieve more consistent earnings growth by specific programs and the divestiture of non-core businesses. Despite the efforts made by the U.S. government to lower military spending, we expect a favorable trend for the company. Finally, the company has strong cash to meet the approved share repurchase program and dividend increases. For these reasons, I feel bullish on this stock.

I would recommend investors consider adding this leading supplier of communications equipment and services for their long-term portfolios. Hedge fund guru John Hussman (Trades, Portfolio) has taken long positions on it in the fourth quarter of 2013.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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