Harris Corp is a California-based global communications, IT and broadcast group. Its flagship unit supplies combat radios for the armed forces, police and emergency services in more than 150 countries.
The firm has a 37% share of the global market (ahead of rivals Thales and ITT). Its lightweight, rugged and ultra-fast Falcon devices have already been battle-tested by soldiers in many of the most hostile territories on the planet.
BUY Harris (NYSE: HRS), says Needham & Co
The trick now is to leverage this top-notch military technology in the commercial field. That’s why Harris bought Tyco Electronics’ wireless unit for $675m in March. The idea is to cross-sell its encrypted communication systems to Tyco’s extensive customer base.
Harris also has two smaller divisions that offer IT services to public bodies, along with developing advanced software platforms for the broadcast sector, serving TV networks such as the BBC, NBC and Viacom. All told, turnover is roughly split between government and private clients on a 50:50 basis.
However, quarterly results announced last week disappointed Wall Street. The group revised down its outlook for the year end June 2010, despite predicting 17% earnings growth in 2009. The extra caution was due to several factors, including the delay of two significant orders.
A $250m contract from the Iraq Ministry of Defence is now expected to be received in smaller increments over several years, while a $500m deal with the US army has been scaled back due to Barack Obama’s plans for troop withdrawals in Iraq. The other issue has been the adverse effect of the recession on the TV broadcasting unit.
The board still expects 2009 sales and underlying earnings per share (EPS) of $4.9bn and $3.93 respectively, and $5bn and $3.25 for 2010. And the medium to long-term picture is far brighter; Harris is packed with best-in-class technology that will be deployed in more and more non-military applications. Better still, demand is growing abroad.
Overseas regions account for 35% of revenues, up from 27% in 2008. I would value Harris on a through-cycle multiple of ten times operating profit (EBITA). After adjusting for the $850m of net debt, that gives an intrinsic worth of about $45 a share.
In terms of the risks, dealing with any government presents headaches, while UK investors also need to consider foreign-exchange implications and the dangers of operating in high-tech markets. All the same, Harris’s technology is at the heart of the digital battlefield, and it is well placed to benefit as advanced communication systems become increasingly adopted in everyday life.
Recommendation: BUY at $29
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments