Harris Corp: Earnings Preview

Oct.24.10 | About: Harris Corporation (HRS)

Harris Corp. (HRS) is slated to release its first quarter 2011 results on Monday, October 25. The current Zacks Consensus Estimate for the first quarter is $1.24, representing a significant annualized growth of 49.48%.

With respect to earnings surprise, over the trailing four quarters, Harris has outperformed the Zacks Consensus Estimate for all four quarters. The average earnings surprise was a positive 9.09%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Fourth-Quarter Performance
On August 3, Harris reported its fourth quarter fiscal 2010 results. Quarterly adjusted (excluding acquisition-related costs) EPS of $1.24 was exactly in line with the Zacks Consensus Estimate. Reported GAAP net income was $151.4 million or $1.16 per share compared with a net loss of $156.4 million or a loss of $1.18 per share in the year-ago quarter. This was mainly attributable to a strong demand for tactical radios and solid operating performance by the overall RF segment.

Consolidated revenues of the fourth quarter were $1,455.9 million, below the Zacks Consensus Estimate of $1,491 million but up 12.5% year over year. This was primarily due to a strong performance of RF communications and Government Communications Systems businesses. Total orders in the fourth quarter were $1.72 billion compared with $1.29 billion in the prior-year quarter.

Agreement of Estimate Revisions
In the last 30 days, out of the 14 analysts covering the stock, none increased or decreased their EPS estimates for first quarter fiscal 2011.

In the last 30 days, out of the 14 analysts covering the stock, none increased or decreased their EPS estimates for fiscal 2011. Similarly, for fiscal 2012, out of the 11 analysts covering the stock, there were no revisions to the EPS estimates.

Magnitude of Estimate Revisions
Earnings estimates for the first quarter, in the last 30 days, remained flat at $1.24. Similarly, for the fiscal year 2011, the earnings estimates revision was flat at $4.68, while for fiscal 2012, the earnings estimates were up 2 cents from $4.71 to $4.73.

We believe the company’s operational performance has been excellent, the balance sheet remains strong, recent acquisitions appear promising and EPS estimates are likely to move higher.

Our Take
Given the company’s strong market position in several niche communications equipment categories, its favorable near- to long-term outlook, and solid finances, we believe Harris deserves to trade at a higher multiple than its current valuation. However, the stock price moved up significantly during the past one year, which we believe may restrict any above-market movement in the near term.

However, the company depends on the U.S. Government contracts for a major part of its revenues. In future, Federal budgetary pressures may result in deeper-than-expected cuts in defense spending, which may significantly impact the company’s business prospects.

We believe the company will benefit from higher defense expenditure by the U.S. government, coupled with new expansion drives in the Asian, European & African markets. Acquisition of CapRock will enable Harris to find a meaningful foothold in the lucrative energy market.

We maintain our long-term Neutral recommendation for Harris. Currently, it is a short-term Zacks #3 Rank (Hold) stock.