We reiterate our long-term Neutral recommendation on Harris Corp. (HRS - Analyst Report) following its mixed financial results in the fourth quarter of fiscal 2013. While earnings per share easily surpassed the Zacks Consensus Estimate, revenue fell short of the same.
Why Keeping at Neutral?
Harris is facing several near-term concerns as the contraction of the U.S. and international defense expenditures may act as major threats to the company. Though management remains confident that the company’s consolidated pipeline opportunity is still intact, we are not sure exactly when these contracts are going to be realized.
In order to minimize the negatives of defense budget contraction, management is emphasizing other business verticals including, IT transformation of the healthcare industry, public safety communications, and maritime communications.
Nevertheless, Harris is currently trading at attractive multiples with respect to several valuation metrics compared with the industry average and S&P 500. Harris currently has a Zacks Rank #3 (Hold).
Risk/Reward Virtually Balanced
Harris depends on the U.S. Government contracts for a major part of its revenue. The Department of Defense has decided to squeeze 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 policy in foreign relations may result in the termination of some major international contracts. Additional risks may emanate from large long-term fixed-priced contracts if costs escalate beyond contract pricing.
However, demand for the RF Communications products in the International markets is likely to remain firm since Harris’ next-generation Falcon III tactical radio is receiving increasing market traction. At the end of the reported quarter, order backlog came in at $1.142 billion including $561 million in Tactical Radio Communications and $581 million in Public Safety and Professional Communications.
Management estimated that within the U.S., in the coming 12-18 months, the opportunity pipeline is $1.2 billion and for the international market, the opportunity pipeline is $2.4 billion.
Other Stocks to Consider
Other stocks to consider in the communications and information technology provider for government and public utility segment are The Boeing Co. (BA - Analyst Report), General Dynamics Corp. (GD - Analyst Report) and Motorola Solutions Inc. (MSI - Analyst Report). Boeing currently has a Zacks Rank #2 (Buy), whereas both General Dynamics and Motorola Solutions carry a Zack Rank #3 (Hold).