Harris: Submarines to Satellites

09/13/2018 5:00 am EST


John Eade

Chairman & 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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