been seven months since James Mattis occupied the role of Secretary of Defense. Now we have nominee and long-acting Secretary Patrick Shanahan sinking in a boiling scandal of domestic chaos and violence, a botched cover-up, and suspect harboring regarding his son and an assault with a baseball bat. Shanahan has been playing a high-level decider role in Pentagon procurement actions.
Many contractors troll the beltway and the Crystal Palace clocking very big D.C. business. But who’s shares were up 2.24% yesterday? And who’s technology now feeds the data-ravenous brain of the F-35 joint strike fighter? And who’s share price has cranked 45.8% year-to-date, but yet remains affordable on a growth adjusted basis? That would be the high-flying yet quiet Harris Corporation. We’d never heard of Harris. Now we know and we’re sharing what we learned with you.
We only paid up moderately for the chance to participate in a sprawling multiyear global defense modernization program. The program rolls fast on a systematically growing budget, already authorized, yet in the early stages. Harris is there, on multiple fronts. You can be too.
quarter of this year’s S&P 500 run was driven by only four stocks; Amazon, Apple, Microsoft, and Facebook. There have been no discussions with China since May 3rd, and the FOMC concludes their meet today. For 45 days trade talks have been on hold, and then came the Tweet yesterday, sending indexes directly into a Roman candle sky burn. And today? We’ll see what Powell’s got in his pocket this very afternoon. Grab your seat yo, and use both hands. You may need some defense.
HRS is defense. Most immediately HRS is associated with cutting-edge multi-channel radio. They do much more. Ever heard of their T7 ordinance disposal robot? They recently sold those to the UK’s Ministry of Defense. Got bombs? Get a T7. “Defense contractors” you say?
When bond yields sink below angry market waves many investors go bolder and seek exposure on the high ground of growth. They pay up for said. Good luck locating any of that, at anything near affordable. But Fitz, STOCKjAW’s crack Money Man did precisely that. How? He’s a long-time aerospace/defense and composites expert and industry insider. Following decades in the biz he turned and suggested “Let’s look at Harris.” We did. Now we’re jazzed to steer that toward you.
Harris is about to become L3 Harris. L3 Technologies is bringing all of their expertise to join Harris in a merger of equals, thus creating what will be the 10th largest defense contractor in the world. Yet Harris alone does much more than defense–civil and commercial, Earth observation and environmental, critical networks including managed systems supporting air traffic control, electronics and avionics. More on avionics below.
Harris Corporation creates solutions and answers out of their HQ in palm-treed Melbourne Florida. HRS has something for absolutely everybody. You want a durable civil communications system, something capable of handling widespread disaster relief or rescue following a hurricane or flooding? Harris has that. Need secure multi-channel radio for tactical defense? Um hum, Harris. How about extraordinarily robust management systems for air traffic, or critical marine communications? Right. Harris does all that and still more.
If you need to communicate, observe, analyze, or manage, over large areas, HRS does it, on the ground, from single or multiple locations, in flight or in orbit. They span it all–civil, commercial, and scads of defense.
management seems a tag-team of brilliance. CEO William Brown runs this four-armed operation of $22.7 billion. Wall Street analysts love HRS, and increasingly so do we. There is a lot to love, and learn. HRS is not Tupperware. Too expensive you’re asking? No. But it’s not S&P cheap. Nothing good ever is.
HRS is currently firing on all segments while trading at a very reasonable 1.48 PEG. Consider the PEG ratio the top valuation metric for anything with real EPS growth.
has run 4.1% over the last 20 sessions, 43.5ytd, and 30.6% over six months. That’s the 2nd highest six month return out of the 13 defense stocks Sj tracks. Only L3 Technologies has grown more at 32%, and HRS and L3 are merging as we speak, with almost zero business overlap. That’s known as ideal, and a rarity. It’s a twofer.
Harris Corporation(HRS) and L3 Technologies(LLL) rank #1 and #2 in highest six month return out of the 13 defense contractors Sj currently tracks. This year we’ll see the two become one, a merger expected to close midyear, soon, very soon. 500 million is the expected synergy in savings, for two companies with nearly zero overlap. You call that a win-win.
But is Harris Corporation a good stock? Harris(HRS) operates in four distinct segments including their largest–Communication Systems, Space and Intelligence, Electronic Systems, and Critical Networks. The company’s current primary profit driver is the AMPRC-158 Manpack multi-channel radio, for the Army, Marines, and SATCOM.
“The Harris AN/PRC-158 radio features a two-channel, software-defined architecture with integrated cross-banding between waveforms, including TSM, SRW, SINCGARS, SATCOM and others, providing new advanced capabilities while maintaining backward interoperability with legacy radios. The software-defined architecture enables flexibility to respond to new and emerging requirements and allows easy porting of new waveforms. The radio is capable of simultaneously handling classified and unclassified data.”–Business Wire, 6-13-19.
Harris Corporation(NYSE; HRS) 6-18-19 close, +2.24%.
On the Call Q3, May 1, 2019
is currently producing the “highest top line growth in 8 years,” and “exceptional non-GAAP performance,” stated CEO Brown on the Q3 call. “We’re at the front end of the Army’s modernization attempt, with a $7.3 billion modernization budget.” In the Business Wire article HRS is referred to as a “governmental and commercial technology provider.” Well yes, and defense too, a lot of defense, some secret defense. Doing precisely what? Who knows. They can’t talk about it.
On the ultra-crisply delivered call we hear a lot, a lot about very specific products, with fuzzy names which convey nearly nothing to the uninformed. This is complicated business, and the business dynamics are liberally mixed in with partial details concerning on-going contracts, prospects, and product capabilities. It’s tricky stuff to grasp. We do hear for example about an materializing effort in “airborne radio for the Army’s Apache helicopter. That was an intelligible bit of an otherwise dense report.
While Communications Systems is the company’s main driver, we’re told “Electronics is up 7%y/y,” as is that of “Space and Intelligence.” We hear of the “Improving growth outlook.” We hear from super-sharp company CFO Rahul Ghai that results are driven by “volume and operating efficiencies,” and that “guidance is on our high end of estimates at FY’19 revenue growth of 9% from strong performance.”
CEO Brown says “we’re on path for a record year. And we expect growth momentum to continue for the medium term. We have good growth in our backlog, and backlog is quite strong. We’ve raised guidance three times this year. The defense modernization budget is growing by two-thirds over the next two or three years.”
the funky thing. Whether measured over a six month period, or year-to-date, it’s still HRS and LLL leading the big group of 13 defense contractors in returns. Year-to-date LLL’s delivered 43.1% and HRS 41.5%. The new entity is said to be called L3 Harris. When you buy HRS now you will also receive this fabulous one-time offer of L3 technologies for free, as your special gift–if you order in the next ten minutes.
Out of all Harris does, only the small environmental effort lags. That’s not new. It’s in fact “taken downward steps for several years.” CEO Bill Brown says that “it’s now troughing. We don’t expect ’20 to be another step down. We think it will be a mid-single digit grower in the near future.”
the Magellan Fund, from Fidelity? Famed fund manager Peter Lynch made that fund glow. Over his tenure from 1977-1990 the fund clocked an average annual return of 29.2%, and became the best performing fund on the planet. It grew from 18 million to 14 billion under Lynch.
Lynch might hate HRS due to the complexity of the business. Peter’s ideal investment, as stated in one of his two books is “a gravel pit.” Yet Lynch wouldn’t hate HRS’s growth, a characteristic which he would say marks the company as a “fast grower,” a company consistently growing at a double digit or better rate. “What’s important when evaluating a company? Earnings, earnings, earnings.” Peter himself would tell you that you’ve gotta step out, but not too far. In our view, that’s Harris. Check out the sparkling metrics from the HRS Q3 report. Link below. We’ll have more to come. As always, good investing and good luck.
Not only did HRS triumph in the competition for the highly contested F-35 program upgrade, they also prevailed in the battle for the Navy’s brand new unmanned carrier-based refueling aircraft, yet in progress.
Boeing “Open systems architecture” contest for the MQ-25 program
Harris Corporation Investor Relations
Q3, Mary 1, 2019 Conference Call;
The Investing Journey
Thanks for Reading.