Investors have shunned defense stocks over concerns around mounting government budget cuts. Most of the concerns are warranted, as the pentagon has said that all spending is on the table for possible cuts. One defense stock that has, in my opinion, been unduly punished is Harris Corp (HRS).
Harris is a defense company and more. Actually Harris should be considered a technology company. They are a communications and information technology company serving both government and commercial sectors worldwide. Harris operates three segments, RF communications, government communications systems, and integrated network solutions. The RF communications segment is the largest operating segment and boasts profit margins of around 30%.
In the fiscal year 2010 Harris reported earnings per share of $4.27. Harris predicts earnings per share will grow to $7.00 by fiscal year 2014, according to a recent 8-K filing. The company predicts profit margins in its RF communications segment will expand to 34-35% in fiscal 2011. In addition, the company is predicting earnings of $4.80 - $4.90 per share.
Harris has an exciting future. The company continues to contract with governments around the world for communication equipment. It has a growing cloud computing business, where it is working with the U.S. government and commercial sectors to move data to its secure cloud network. Overseas expansion and cloud based IT services should help fuel growth well into the future.
Despite the exciting future, Harris trades at very reasonable valuations. The stock, at $50, trades at just over 10 times forward earnings and under 9 times cash flow. Harris has a price/owner earnings ratio of less than 12. Harris yields 2% annually and has a 20% dividend payout ratio. It has grown its dividend at an annualized rate of 29.7% over the last five years.
|Market Cap||$6.4 B|
|5 Year Div. Growth Rate||29.70%|
|Return on Equity||197.00%|
|Revenue TTM||$5.63 B|
|Operating Cash Flow FYE||$803 M|
|Capex FYE||$198 M|
|Capex/Cash Flow FYE||0.25|
|5 Year Rev. Growth Rate||11.70%|
|5 Year Cash Flow Growth Rate||20.70%|
|5 Year Earnings Growth Rate||24.00%|
|Net Profit Margin||10.79%|
|Current Assets||$2.37 B|
|Return on Assets||11.86%|
|Long-term Debt||$2.0 B|
Harris does have $2 billion in long-term debt, but it generated $800 million in operating cash last year. In addition, cash flows have grown at 20% per year for the last five years.
Zacks Investment Research rates Harris a neutral. Zacks cites valuations as a reason for the neutral rating stating that they believe the positive outlook is priced into the shares. I disagree. In my view Harris is undervalued. With multiple growth opportunities ahead of Harris, the valuation is very reasonable. This is one defense stock ready to fly high.
Disclosure: I am long HRS.