L3Harris Earnings: Putting Pieces Together Toward Double-Digit Margins; Valuation up 1% to $230

With L3Harris’ LHX third-quarter results in hand, we have raised our fair value estimate for the narrow-moat defense contractor by just over 1% to $230 to account for the time value of money. Year to date, the company reported steady growth across its segments, with segment operating margins over 14%, which bodes well for future quarters if the company can fulfill its multiple post-merger plans to increase margins further.

The company is the result of a series of strategic mergers, like most of its larger “prime” defense contracting peers, but it is a bit earlier in its evolution by comparison. The company announced that 2024 would begin the next phase of its merger integration between L3 Technologies and Harris, itself consummated in 2019—referring to this as the hard work beyond finding obvious cost overlaps to finding ways for its teams to work together on projects they might not have been able to pursue as well if they weren’t part of the same company. We believe this will credibly result in some opportunity, reflected in our long-term revenue and profit forecast.

In 2023, the firm completed the acquisition of ViaSat’s data link networking business, as well as the more transformative Aerojet Rocketdyne, which supplies rocket motors and munitions to the defense and aerospace industry. Aerojet Rocketdyne has suffered recently from supply chain bottlenecks as many inputs for rockets are rare and may come from only one or two specialized suppliers. Its products are in sharp demand as global stockpiles of munitions, missiles, and rockets are depleted and restocked as a result of military conflicts in Ukraine, Israel, and elsewhere. Inclusion in the L3Harris portfolio should help with the supply chain as the larger firm has the people and resources to send to suppliers (and their suppliers) to work through bottlenecks.