The Watchword Is Security

05/20/2009 11:20 am EST

Focus: STOCKS

Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says that Harris is a good play on high-tech security for government and the private sector alike.

Harris (NYSE: HRS) makes highly secure communications equipment and solutions for government and media broadcasters. About two-thirds of fiscal 2008 revenues came from US government contracts. About one-fourth were generated abroad.

The government communications systems (GCS) segment produced 47% of first-half fiscal 2009 revenues. This segment develops and supplies communications and information network equipment for various government agencies.

Defense products include satellite communications terminals, satellite antenna reflectors, flat panel antennas, and aviation electronics, such as radios, digital maps, and sensors.

National intelligence products include surveillance and reconnaissance systems for various intelligence and security agencies such as the National Security Agency, the National Reconnaissance Office, and the National Geospatial-Intelligence Agency.

GCS also serves civilian agencies such as the Federal Aviation Administration, the Census Bureau, the National Oceanic and Atmospheric Administration, and the Department of Homeland Security. It also provides information technology (IT) services such as outsourcing, enterprise management, and planning.

The RF communications (RFC) segment produced 29% of sales, and provides a variety of highly secure, mobile and fixed tactical radio frequency communications products for defense and other government uses.

Broadcast communications, [which] produced 11% of sales, serves the television and radio industries and offers equipment and solutions for infrastructures, networking, managing media and workflow, and transmitting digital and analog signals.

Harris Stratex Networks accounted for 13% of sales, [and] it offers wireless transmission solutions to telephone service providers. It combines HRS’s microwave communications division with Stratex Networks, of which HRS owns 56%. However, HRS will spin off this business through a stock dividend payable May 27th.

The increasing need for security, speed, interoperability, and reliability in communications has fueled demand for HRS’s products. Fiscal second-quarter net revenues increased 15.6% year-over-year to $1.52 billion. The gross profit margin declined 74 basis points to 30.34%, but the operating profit margin expanded 121 basis points to 14.81%. Pro forma net income grew 20% to $143.9 million, or $1.08 per share.

Investment risks include reductions in government spending and order delays from commercial customers. We believe these concerns are already reflected in the stock, which is more than 50% off its 52-week high. Management is calling for a 17%-20% increase in fiscal 2009 earnings per share. Some of the gains will come from a $600- million share repurchase plan.

Prospects look promising. HRS recently secured a ten-year, $600-million contract from the US Army, which calls for replacing up to 80 strategic satellite communications terminals. Commercial broadcast customers are still transitioning from analog to digital technologies.

Some existing digital infrastructures need to be upgraded to deliver evolving content such as HDTV, Internet protocol TV, and video on demand. HRS plans to acquire Tyco Electronics’ (NYSE: TEL) wireless systems business for $675 million. This business, which generated $463 million in the last fiscal year, should contribute to HRS’s bottom line by fiscal 2010. (The stock closed below $18 Tuesday—Editor.)

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