S&P 500: -16.55 (-2.01%)
Harris Corp (HRS) +0.50% *contact for tearsheet*
Harris was left out of yesterday’s big rally, as an analyst downgrade pushed shares 8.7 percent lower. Although Harris classified as an Information Technology company, it’s hard not to group them with defense companies since more than two-thirds of their revenue comes from U.S. defense spending.
Defense companies have been hit hard in recent weeks due to concerns of a U.S. defense budget squeeze. However, the market seems to be overlooking the stability of a U.S. defense budget slated to grow 4 percent over the next several years – a growth rate many industries can’t measure up to. More importantly, Harris is well-positioned in the intelligence and communications market, which is expected to receive priority funding from the government over weapons spending (tanks, planes, missiles, etc).
The biggest reason we like Harris, however, is their strong product portfolio has attracted potential suitors and raised the possibility the firm will taken over. Defense companies with a product portfolio more leveraged towards weapons may seek firms like Harris with strong presence in intelligence, surveillance and communications to replace revenue lost as a result of the new defense budget. Harris’ cash generation abilities and low debt levels only make them seem that much more attractive from a takeover perspective.
Even if they aren’t acquired in the near term, strong returns on invested capital (ROIC) and a health dividend (2.3 percent dividend being increased at a 31 percent annual rate) make us happy to own the stock.
Quick Hits
- Stress-Test Results, Earnings Set Up as Next Key Events
- Eat-What-You-Kill Bond Traders Rise From Wreckage
- Cranking Up The Outrage-O-Meter
- All Hail the New Bull Market!
Peter Lazaroff, Junior Analyst
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