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Analyst Blog

On Sep 18, we maintained our Neutral recommendation on Harris Corp. (HRS - Analyst Report). The company reported mixed fourth-quarter 2013 results with the bottom line missing the Zacks Consensus Estimate but the top line beating the same.

Why Reiterated at Neutral?

Recently, Harris won a $960-million major deal from the U.S. Air force Network-Centric Solutions-2 (NETCENTS-2) Application Services. Per the deal, Harris will supply indefinite amount of IT related products and services for three years. 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.

Moreover, the company is on the verge of signing deals with four major airlines on DCIS equipage and has won $150 million contract for a period of seven years from the Federal Aviation Administration’s (FAA) NextGen Data Communications Program. Such robust growth prospects have induced the company to provide an improved financial guidance for fiscal 2013.

Harris mostly depends on the U.S. Government contracts for a major part of its revenues. The Defense Department has decided to reduce its budget by nearly $500 billion over the next decade. In the future, any additional Federal budgetary pressures may result in deeper-than-expected cuts in defense spending, which may significantly impact the company’s business prospects.

Furthermore, a shift in the U.S. Government’s foreign policy may result in the termination of some major international contracts. Additional risks may emanate from large-scale long-term fixed-priced contracts if costs escalate beyond contract pricing.

We believe that the ongoing defense 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.

Harris currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

The stocks that are performing better in the defense sector and public safety are General Dynamics Corp. (GD - Analyst Report), The Boeing Co. (BA - Analyst Report) and Motorola Solutions Inc. (MSI - Analyst Report). All three have a Zacks Rank #3 (Hold).

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