Harris Corporation (NYSE: HRS) isn't one of the best known communication companies; however, Harris' four business segments are leaders in their respective markets. If all four can achieve their potential, then Harris will exceed expectations by growing at a solid double-digit rate. We're going to look at each segment individually to see where the company is headed.
The Government Communications segment represents 48% of the company's nine-month revenue of $3.04 billion. This business conducts advanced research studies, develops prototypes, provides technical services, and produces and supports state-of-the-art communications for the mission-critical communication needs of military and government customers. It also provides the technology-base for the company's other commercial businesses.
For the company's third quarter ending March 2007, revenue grew by 9.5%, and for the last nine months it grew 8.3%.
The government contract sector is hard grow rapidly. However, this segment has three important factors that are helping the company achieve higher growth and profitability:
1 - This segment brings a backlog of over $4 billion, which provides a sustainable base of business.
2 - Much of the knowledge gained from government communication R&D transfers to its commercial business segments, helping to increase their technology base.
3- It is acquiring Multimax, a leading provider of mission-critical communications and IT network systems and services for the U.S. Government.
It is paying $400 million in cash for Multimax, a company that generated $315 million in the latest 12 months. Besides being immediately accretive, the Multimax acquisition gives Harris a number of large contracts that Harris can use to sell new products and services to. Harris was not a party to these contracts in the past.
In addition, management has identified more than $500 million in new business opportunities it can pursue 90 days after the acquisition is completed, scheduled for the end of June 2007. Also, the management of Multimax has significant experience in selling and delivering higher-margin fixed-price contracts on time and at or below budget. This should help this business segment to expand its margins as well as increase its revenue growth.
Radios for Military and Commercial Uses
The RF Communications segment provides end-to-end wireless-transmissions solutions for mobile and fixed-wireless service providers and private networks throughout the world. In the third quarter of 2007 this segment achieved revenue growth of 42.1 percent and operating income increased 42.1% compared to the prior-year quarter. This segment's operating income increase is primarily the result of demand for its Falcon II and Falcon III tactical radio systems from both domestic and international customers.
The company anticipates significant growth from its portfolio of radios for the U.S. Department of Defense. Also, it is receiving strong interest from several other countries where demand for radios is growing. It just received an order from the U.S. military for $2.74 billion to supply single-channel handheld radios. This will help drive this division over the next couple of years.
With a gross margin in excess of 30%, RF Communications is the most profitable segment of Harris. When coupled with its current growth, RF Communications will continue to contribute to increased growth of Harris.
Building Wireless Networks
Communications companies throughout the world are building new or upgrading existing wireless networks to offer many new digital services. Harris Stratex Networks (Nasdaq: HSTX), is a 57% owned subsidiary and is one of the largest independent supplier of wireless transmission systems in the world.
For the nine months ending March 31, 2007, Harris Stratex revenues were $333.9 million, up 40.2% from $238.2 million one year ago. Gross margin was $157 million compared to a negative $25.5 in the year ago period.
Third Generation wireless networks are rolling out globally and Harris Stratex is well positioned to take advantage of this rapidly growing opportunity.
The increased demand for the company's products came from both wireless service providers and private networks. Mobile operators are beginning to substitute microwave wireless capabilities for leased lines to reduce network operating costs, expand their geographic footprints and increase their capacity to handle high-bandwidth voice, data and video services. Private network demand also increased, driven by the need for higher bandwidth and by the availability of federal grant dollars to improve interoperability of public safety networks.
High Definition Broadcasting
If you watched television today, the chances are that the broadcast was made with Harris Broadcast Communications equipment. As a leader in radio and television broadcast equipment, Harris is in a position to seize on the transition to digital technology. The U.S. Federal Government has mandated that all Over-the-Air (OTA) analog broadcast television in the United States cease on February 17, 2009 and only digital broadcast will be permitted. The idea is to force everyone to convert to the digital format. Harris' Broadcast Communications business is well positioned to take advantage of this significant transition from today's analog format to the digital transmission format.
However, the uptake by broadcast companies and cable companies has been slower than expected, resulting in lower revenue for Broadcast Communications. This is likely due to some uncertainty and confusion regarding when the transition to digital television would finally take place. On February 8, 2006, President Bush signed the Deficit Reduction Act, which also included the Digital Television Transition and Public Safety Act. This set February 17, 2009, as the final, cut-off date for OTA Analog TV Broadcasts.
In any case, Broadcast Communications has been downsizing the division to fit the expected revenue model going forward. This will help reduce costs and improve profitability. As a sign that the demand for digital broadcast equipment appears to be picking up, order rates are up 12% year-over-year, although they are still slightly below revenues through the last three quarters. Management expects order rates to surpass revenues in the next quarter, which should lead to improved growth and profitability. As a result, it looks like this business unit will return to profitability and begin to grow.
The Bottom Line
The market position of each of Harris Corporation's businesses gives it the distinct potential to generate solid double-digit growth over the next several years. It is conceivable that revenue could double by 2009 and earnings could grow threefold. For this to happen each business unit would have to perform as described, but that is certainly likely. Harris Communications definitely deserves a second look for investors searching for a quality company that is the many of the right businesses.
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