On Dec 19, we maintained our Neutral recommendation on Harris Corp. (HRS). The company reported mixed first-quarter 2014 results with the bottom line outpacing the Zacks Consensus Estimate but the top line missing the same.
Why Reiterated at Neutral?
Recently, the U.S. Army raised the amount of the IDIQ tactical communications deal with Harris to $847 million. The contract was signed in 2011.
Nevertheless, winning two major contracts worth $960 million and $150 million from the U.S. Air force Network-Centric Solutions-2 (NETCENTS-2) Application Services and the Federal Aviation Administration’s (FAA) NextGen Data Communications Program, respectively, and the the U.S. Army decision to spend roughly $600 million on mid-tier radios over the next 10 years will continue to bolster the company’s revenue growth going forward.
The acquisition of CapRock Communications gives Harris a strong foothold in the lucrative energy market. CapRock is a global provider of managed satellite communications solutions for energy, government and maritime industries.
The CapRock unit has struck a five-year deal with Carnival Corporation (CCL) to deliver communications services to more than 100 cruise ships of 10 different cruise lines. Moreover, it has won a seven-year deal worth $45 million from an oil and gas equipment service company, which we believe will further drive the company top line going forward.
Harris continues to boost shareholders’ wealth by paying uninterrupted dividends throughout the year.
Harris mostly depends on the U.S. Government contracts for a major part of its revenues. The Defense Department has decided to reduce 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’s foreign policy may result in the termination of some major international contracts. Additional risks may emanate from large-scale long-term fixed-priced contracts if costs escalate beyond contract pricing.
We believe that the ongoing defense budget contraction will continue to affect Harris in the long run. Moreover, demand for the high-margin Integrated Network Solution products is weaker than expected primarily due to a delay in the healthcare software release.
Harris currently carries a Zacks Rank #2 (Buy).
Other Stocks to Consider
The stocks which are performing better in the similar sector are Ubiquiti Networks, Inc. (UBNT), Qualcomm, Inc. (QCOM) and Motorola Solutions Inc. (MSI). Both, Qualcomm and Motorola Solutions have a Zacks Rank #2 (Buy) while Ubiquiti Networks has a Zacks Rank #1 (Strong Buy).
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