Is Harris Corporation (NYSE:HRS) A Cash Cow?
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Harris Corporation (NYSE:HRS) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through HRS’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
See our latest analysis for Harris
What is Harris’s cash yield?
Harris’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Harris to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Harris’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Harris also generates a positive free cash flow. However, the yield of 3.66% is not sufficient to compensate for the level of risk investors are taking on. This is because Harris’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Harris’s yield sustainable?
Does HRS’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 81%, ramping up from its current levels of US$847m to US$1.5b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, HRS’s operating cash flow growth is expected to decline from a rate of 47% in the upcoming year, to 11% by the end of the third year. But the overall future outlook seems buoyant if HRS can maintain its levels of capital expenditure as well.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Harris relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Harris to get a better picture of the company by looking at:
Valuation: What is HRS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HRS is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Harris’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
