Crossed Wires At Harris Corp.

By Ryan C. Fuhrmann | August 03, 2012 AAA

Harris Corp. (NYSE:HRS) is technically considered a communications equipment provider in the technology sector. However, a high percentage of sales are made to the U.S. Department of Defense (DoD) and related military and intelligence agencies. As such, its stock tends to trade along with overall defense industry trends. This is somewhat warranted, but the company serves plenty of other industries and its valuation appears overly depressed, compared to peers and other large defense firms.

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Recent Results and Outlook
Harris reported full year results on Tuesday. Fiscal 2012 sales grew less than 1% to $5.45 billion. Two of Harris' three operating units reported positive growth. RF Communications, which sells tactical radios to the military and commercial enterprises, was the only decliner and reported a 6.4% decrease in sales to account for just less than 40% of sales. Integrated Network Solutions provides IT solutions that must be mission-critical government and civilian functions. It logged solid growth of nearly 9% to weigh in at nearly 29% of the total top line. Government Communication Systems grew a more modest 3.3% to make up the rest of sales.

A hefty $528.1 million charge reduced reported net income to $30.6 million, or 26 cents per diluted share. This reflected a decision to divest its broadcast communications business. Backing out the charge, recurring earnings advanced a positive but modest 2.3% to $4.83 per diluted share. Free cash flow is a better measure of annual capital generation and was quite strong at $643 million, or approximately $5.60 per diluted share.

Harris also announced fiscal 2013 targets. It expects sales growth as high as 2% that should work out to total sales of close to $5.5 billion. Recurring earnings should reach between $5.10 and $5.30 for a slight annual decline from 2012.

SEE: Great Expectations: Forecasting Sales Growth

The Bottom Line
At a current share price of around $42 per share, Harris trades at very low multiples. Its forward earnings multiple is below eight and trailing free cash flow figure is 7.5, or the same as its trailing earnings multiple. This compares quite favorably to direct rivals that include Rockwell Collins (NYSE:COL), Motorola Solutions (NYSE:MSI) as well as defense giants General Dynamics (NYSE:GD) and Northrop Grumman (NYSE:NOC).

The former's competitor trades for double-digit forward multiples and while General Dynamics and Northrop trade at similarly appealing high single-digit multiples, they remain directly in the line of fire for defense spending cutbacks from the federal government. Harris should have a decent degree of insulation from cuts to larger scale combat operations, given its support of U.S. intelligence gathering, such as those to combat terrorism.

Harris is also beginning to emphasize other industries, including healthcare IT transformation, public safety communication devices and maritime communications regarding ship tracking and transit. Its current backlog is down as much as 8% from last year, but still stood at around $7 billion to support more than a year of annual revenue.

Its strongest selling points from an investment perspective include the solid free cash flow production and appealingly low valuation. It also supports a solid current dividend yield of 3.1% that is easily covered by cash flow production. In addition, most free cash flow goes to buying back shares, which can help keep per-share profits moving forward, until the sales climate improves a bit further.

SEE: A Breakdown Of Stock Buybacks

At the time of writing, Ryan C. Fuhrmann did not own shares in any company mentioned in this article.

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