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We downgrade our recommendation on Harris Corp. (HRS - Analyst Report) to Underperform, ahead of its third quarter fiscal 2013 financial results, which will be released on Apr 30, before the opening bell.

Why the Downgrade?

Harris is suffering from tightness in the U.S. government spending for defense coupled with a slowdown in international defense expenditures. The reduction in budget spending that began last month resulted in delays in tactical radio procurements coupled with the growing concern that major tactical radio orders from international markets will be postponed to later this fiscal or early in the next. We believe that the ongoing defense budget contraction will continue to affect Harris in the long run and see no immediate growth catalyst. Harris currently has a Zacks Rank #4 (Sell).

Major Concerns

Recently, Harris declared its revised financial guidance for fiscal 2013. On a GAAP basis, earnings per share are now expected to be within the range of $3.95–$4.33. The revised guidance for adjusted earnings per share for fiscal 2013 was $4.60 to $4.70 compared with the prior guidance of $5.00– $5.20. The first guidance range was $5.10 to $5.30. Total revenue for fiscal 2013 is now expected to decline by 6% to 7% year over year compared with the prior estimate of a decline of 2% to 4%.

The main reason for this soft outlook is weaker-than-expected demand for the company’s tactical radios from international customers. The U.S. is expected to reduce its activity in South-East Asia. Furthermore, the ongoing global macroeconomic headwinds took a toll on the company’s order bookings. To cope with this juncture, Harris has decided on curtailing expenses and headcount reduction. These cost-control measures will result in $65 million to $115 million pre-tax charges but annual cost savings of $40 million to $50 million.

Other Stocks to Consider

While we prefer to avoid Harris until we see signs of improvement in the company's performance, other stocks in this industry that are worth considering include Motorola Solutions Inc. (MSI - Analyst Report), Sonus Networks Inc. (SONS - Snapshot Report) and InterDigital Inc. (IDCC - Snapshot Report). All the three stocks carry a Zacks Rank #2 (Buy). 

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