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We upgrade our recommendation on Harris Corporation (HRS - Analyst Report) to Neutral from Underperform following mixed third-quarter fiscal 2013 financial results.

Why the Upgrade?

The company’s earnings per share of $1.12 were in line with the Zacks Consensus Estimate. However, consolidated revenues in the reported quarter stood at $1,203.7 million, down 12.1% year over year, missing the Zacks Consensus Estimate of $1,209 million.

Harris is suffering from tightness in the U.S. government spending for defence coupled with a slowdown in international defence expenditures. The reduction in budget spending that began in March resulted in delays in tactical radio procurements. The budget contraction also caused growing concern that the major tactical radio orders from international markets will be postponed to later this fiscal year or early next year.

However, Harris has won a major $500 million contract extension from the U.S. Army Communications Electronics Command recently. Additionally, Harris has won several orders for its tactical radio products from the international markets, which will not only strengthen its order book but will also compensate the weakness in the domestic market.

We believe that the ongoing defence budget contraction will continue to affect Harris in the long run. Moreover, demand for the high-margin Integrated Network Solution products is weaker than expected primarily due to a delay in the healthcare software release. Additional risks may emanate from large-scale long-term fixed-priced contracts if costs escalate beyond contract pricing.

In order to minimize the negatives, Harris is emphasizing on other business verticals including IT transformation of the healthcare industry, public safety communications and maritime communications.

Currently, Harris carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Other stocks in this industry that are worth considering include ShorTel Inc. (SHOR - Snapshot Report), Ubiquiti Networks Inc. (UBNT - Analyst Report) and InterDigital Inc. (IDCC - Snapshot Report). Currently, Ubiquiti and ShorTel hold a Zacks Rank #1 (Strong Buy), while InterDigital carries a Zacks Rank #2 (Buy).

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