L3Harris (LHX) was created at the end of 2019’s second quarter through the merger of Harris Corp. and L3 Technologies, bringing together two communication technology leaders in the defense arena, explains Stephen Leeb, editor of The Complete Investor.
Strong synergies should result in rising revenues and cost savings, and we expect profit growth to sharply accelerate as the larger company attracts larger projects.
The synergies are apparent in all four domains in which the company operates: air, maritime, land, and space. In space, for example, L3’s leading position in optical tracking and cyber intelligence complements Harris’s optical sensors and satellite imaging.
In air, the combined company will meld L3’s expertise in unmanned flight with Harris’s strong position in electronic warfare and weapons release.
In maritime, both companies bring expertise in sensors, while L3’s expertise in surveillance complements Harris’s leading position in radar.
In land, L3 brings signal intelligence and precision weaponry to the table, boosting Harris’s position in tactical communications, robotics, and integrated battle management.
There are many additional examples of synergies. The upshot should be deeper expansion into foreign markets and larger and more profitable projects domestically. Literally overnight the combined company has gone from two companies that to some degree competed with each other to being the world’s fifth-largest dedicated defense contractor.
Margins for L3Harris already are much higher than for other major defense contractors. The added scale of operations should result in a further expansion of margins as well as sharp expansion in other metrics including FCF and profits. FCF, which was a bit more than $1 billion in 2019, could easily top $3 billion in 2023.
The company’s growth rate will be the fastest among the major defense contractors. Based on the stock’s current price and projected growth, it leads to a projected 2021 P/E of 16 and a projected P/E that should be under 13 – possibly close to 12 – in 2023. L3Harris should provide protection in a very tense world.
