Harris Corp (HRS, Financial) appears on Gurufocus’ Low P/S screen. Harris is an international communications company based in Florida. The company provides RF communication, government communication and broadcast communication services and equipment for government and commercial customers in over 150 countries.
RF Communications ($2,067 million 2010 Revenue)
RF Communications provides secure radio communications and embedded high-grade encryption solutions including the Falcon® family of tactical radios and the Falcon III which supports US military Joint Tactical Radio System (JTRS). RF Communications is also a leading supplier of communication systems and equipment for public safety, utility and transportation markets. Domestic sales (including sales to foreign militaries facilitated through the U.S. government) accounted for 66% of 2010 revenues. The funded backlog has increased from $922M in 2009 to $1,764M in 2010.
Government Communications ($2,688M 2010 Revenue)
Government communications serves customers in defense, national intelligence, federal civil, IT services, healthcare and the cyber field. Domestic sales (including sales to foreign militaries facilitated through the U.S. government) accounted for 96% of 2010 revenues. Funded backlog has increased from $1,146M in 2009 to $1,238M in 2010.
Broadcast Communications ($486M 2010 Revenue)
Broadcast Communications provides services to TV stations, cable, satellite, telecommunication companies as well as government and sports and entertainment customers. Domestic sales accounted for 44% of 2010 revenues. Funded backlog has increased from $247 in 2009 to $260M in 2010.
Harris has a diverse and large communications business and is involved in numerous local, state, federal and foreign projects. For a complete list of all of Harris’ current programs you can read their 2010 annual report here.
Risks
As a government contractor with 76% of total revenue coming from the U.S. government you might think the biggest risk is a slowdown in government spending. Well, you would only be half right. The budget cuts at the Department of Defense, the coming budget cuts of the Congressional “Super Committee” and state and local budget cuts have been in the headlines for months. With a P/E of less than 8 the market is clearly aware of the risks and is pricing Harris very cheaply based on current earnings. The real question is will the budget cuts affect Harris as much as the market believes and severely reduce earnings going forward, or is Mr. Market being overly pessimistic?
2010 Department of Defense Quadrennial Defense Review
The Quadrennial Defense Review (“QDR”) is the main public document produced by the Department of Defense that describes and analyzes strategic objectives and potential threats and the country's military doctrine. The QDR essentially contains the DoD’s blueprint for the future.
The primary military doctrine of the DoD is network-centric warfare or network-centric operations where a force attempts to gain an advantage over adversaries through a networked information advantage. The key tenets of the doctrine are a robust networked force capable of sharing information that increases situational awareness. This increased situational awareness should enable collaboration and self-synchronization and enhance the speed of combat. Other NATO nations such as the United Kingdom and Sweden are beginning or have begun similar transformations.
With an increased focus on robust communications networks and increased C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) Harris should play an increasingly important role in the DoD and other NATO nations procurement plans.
It is also worth noting that the DoD has concentrated budget cuts in reducing administrative staffing and back office operations as well as benefits. A majority of the savings from these measures are being used to increase the amount of new equipment being procured. You can view the DoD’s 2012 budget request here for a complete overview of the cost cutting measures proposed and how the savings are being redeployed.
So, although the overall defense budget is shrinking, new weapons and communications platforms will still be purchased in large quantities. Add in a DoD military doctrine that puts Harris’ products in a critical role and it should continue to ensure Harris receives sizable business from the DoD.
State and Local Governments
The situation with state and local government budgets is a bit direr. States having been making budget cuts across the board and those cuts are likely to include procurement of Harris’ communications products. So far the budget cuts do not look that damaging but quarterly earnings have begun to decrease as the effect of budget cuts is felt.
Competition
Harris competes in a very tough environment. They face competition from nearly every defense contractor and telecommunications company for most of their business lines. Competitors include major defense contractors such as Lockheed Martin (LMT, Financial), General Dynamics (GD, Financial), Raytheon (RTN, Financial) and telecom companies such as Verizon (VZ, Financial), AT&T (T, Financial) and L-3 Communications (LLL, Financial).
Despite these challenges management has done a good job not only increasing earnings but Return on Assets (ROA) and Return on Capital (ROC) as well. ROA has gone from below average to slightly above average and ROC is now solidly above average.
ROA and ROC both decreased last year so it remains to be seen if management can continue to generate above-average returns.
Valuation
With Harris appearing on the Low P/S screen it’s no surprise that Harris is trading cheaply. In fact, the historical valuation chart shows Harris near the lows of its valuation range.
Whether or not this is a fair valuation likely hinges on the outcome of the Congressional Super Committee’s deficit reduction plan. Any massive spending cuts enacted now would push the economy further in to a recession and continue to put pressure on state and local government budgets. Any additional cuts to the DoD budget could also impact future sales for Harris.
Disclosure: Strubel Investment Management and/or its clients are long LMT, RTN, VZ and T
The Buffett-Munger screener is designed to find Buffett-type investments with extraordinary profitability, consistency and future prospects. Our monthly Buffett-Munger Best Bargains Newsletter picks one stock from the screener. Our in-depth analysis shares with you why a younger Buffett and Munger would like this stock. If you are a premium member, you can download it here. If you are not, we invite you for a 7-day Free Trial.
RF Communications ($2,067 million 2010 Revenue)
RF Communications provides secure radio communications and embedded high-grade encryption solutions including the Falcon® family of tactical radios and the Falcon III which supports US military Joint Tactical Radio System (JTRS). RF Communications is also a leading supplier of communication systems and equipment for public safety, utility and transportation markets. Domestic sales (including sales to foreign militaries facilitated through the U.S. government) accounted for 66% of 2010 revenues. The funded backlog has increased from $922M in 2009 to $1,764M in 2010.
Government Communications ($2,688M 2010 Revenue)
Government communications serves customers in defense, national intelligence, federal civil, IT services, healthcare and the cyber field. Domestic sales (including sales to foreign militaries facilitated through the U.S. government) accounted for 96% of 2010 revenues. Funded backlog has increased from $1,146M in 2009 to $1,238M in 2010.
Broadcast Communications ($486M 2010 Revenue)
Broadcast Communications provides services to TV stations, cable, satellite, telecommunication companies as well as government and sports and entertainment customers. Domestic sales accounted for 44% of 2010 revenues. Funded backlog has increased from $247 in 2009 to $260M in 2010.
Harris has a diverse and large communications business and is involved in numerous local, state, federal and foreign projects. For a complete list of all of Harris’ current programs you can read their 2010 annual report here.
Risks
As a government contractor with 76% of total revenue coming from the U.S. government you might think the biggest risk is a slowdown in government spending. Well, you would only be half right. The budget cuts at the Department of Defense, the coming budget cuts of the Congressional “Super Committee” and state and local budget cuts have been in the headlines for months. With a P/E of less than 8 the market is clearly aware of the risks and is pricing Harris very cheaply based on current earnings. The real question is will the budget cuts affect Harris as much as the market believes and severely reduce earnings going forward, or is Mr. Market being overly pessimistic?
2010 Department of Defense Quadrennial Defense Review
The Quadrennial Defense Review (“QDR”) is the main public document produced by the Department of Defense that describes and analyzes strategic objectives and potential threats and the country's military doctrine. The QDR essentially contains the DoD’s blueprint for the future.
The primary military doctrine of the DoD is network-centric warfare or network-centric operations where a force attempts to gain an advantage over adversaries through a networked information advantage. The key tenets of the doctrine are a robust networked force capable of sharing information that increases situational awareness. This increased situational awareness should enable collaboration and self-synchronization and enhance the speed of combat. Other NATO nations such as the United Kingdom and Sweden are beginning or have begun similar transformations.
With an increased focus on robust communications networks and increased C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance) Harris should play an increasingly important role in the DoD and other NATO nations procurement plans.
It is also worth noting that the DoD has concentrated budget cuts in reducing administrative staffing and back office operations as well as benefits. A majority of the savings from these measures are being used to increase the amount of new equipment being procured. You can view the DoD’s 2012 budget request here for a complete overview of the cost cutting measures proposed and how the savings are being redeployed.
So, although the overall defense budget is shrinking, new weapons and communications platforms will still be purchased in large quantities. Add in a DoD military doctrine that puts Harris’ products in a critical role and it should continue to ensure Harris receives sizable business from the DoD.
State and Local Governments
The situation with state and local government budgets is a bit direr. States having been making budget cuts across the board and those cuts are likely to include procurement of Harris’ communications products. So far the budget cuts do not look that damaging but quarterly earnings have begun to decrease as the effect of budget cuts is felt.
Competition
Harris competes in a very tough environment. They face competition from nearly every defense contractor and telecommunications company for most of their business lines. Competitors include major defense contractors such as Lockheed Martin (LMT, Financial), General Dynamics (GD, Financial), Raytheon (RTN, Financial) and telecom companies such as Verizon (VZ, Financial), AT&T (T, Financial) and L-3 Communications (LLL, Financial).
Despite these challenges management has done a good job not only increasing earnings but Return on Assets (ROA) and Return on Capital (ROC) as well. ROA has gone from below average to slightly above average and ROC is now solidly above average.
ROA and ROC both decreased last year so it remains to be seen if management can continue to generate above-average returns.
Valuation
With Harris appearing on the Low P/S screen it’s no surprise that Harris is trading cheaply. In fact, the historical valuation chart shows Harris near the lows of its valuation range.
Whether or not this is a fair valuation likely hinges on the outcome of the Congressional Super Committee’s deficit reduction plan. Any massive spending cuts enacted now would push the economy further in to a recession and continue to put pressure on state and local government budgets. Any additional cuts to the DoD budget could also impact future sales for Harris.
Disclosure: Strubel Investment Management and/or its clients are long LMT, RTN, VZ and T
The Buffett-Munger screener is designed to find Buffett-type investments with extraordinary profitability, consistency and future prospects. Our monthly Buffett-Munger Best Bargains Newsletter picks one stock from the screener. Our in-depth analysis shares with you why a younger Buffett and Munger would like this stock. If you are a premium member, you can download it here. If you are not, we invite you for a 7-day Free Trial.
