Harris: Submarines to Satellites

09/13/2018 5:00 am EST

Focus: INDUSTRIALS

John Eade

Chairman and CEO, Argus Research Group

We met with the management team of Harris Corp. (HRS) on September 6, including CFO Rahul Ghai, notes John Eade, analyst with Argus Research, a leading independent Wall Street research firm.

The company recently wrapped up a year in which it exceeded expectations (EPS grew 18%) and has set guidance for the upcoming year (18%-21% EPS growth) that is aggressive relative to the industry. Management has also established a longer-term outlook that implies double-digit growth out through 2021.

Harris is different from key defense prime contractors such as Lockheed Martin (LM) and General Dynamics (GD) in a couple of ways. The products the company sells (radios, communication systems, night goggles, antennas etc.) are more short-cycle than tanks, submarines and fighter jets.

The products and components are technology-oriented and quicker to manufacture — but also quicker to become obsolete. Consequently, the business is more “commercial.”

Almost 45% of Harris’ staff are scientists or engineers. They primarily are based in the U.S. Given the nature of the products — not heavily reliant on steel or aluminum — Harris is a DOD contractor that does not have a high exposure to the current trade and tariff talks and threats.

CFO Ghai noted particular opportunities in the company’s Space and Intelligence Systems business (31% of FY18 sales). Cyber attacks via satellite (such as the attack in 2017 that affected Merck, Fedex and others) are a new and emerging threat, and demand is poised to grow Harris’ services.

Meantime, the U.S. government defense-spending environment is improving, with 10% budget growth expected for 2018 and a step-up in 2019.

The HRS shares pulled back from all-time highs in May, along with other defense stocks. They have embarked on a recovery, which we think can break through current resistance at $168. Our target price is $190.

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