It has been about a month since the last earnings report for Harris (HRS). Shares have added about 5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Harris due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Harris Q3 Earnings and Revenues Beat, FY19 View Up
Harris reported solid third-quarter fiscal 2019 financial results with double-digit EPS growth for the sixth consecutive quarter driven by highest organic revenue growth and margin in the past eight years. Both the top line and the bottom line surpassed the respective Zacks Consensus Estimate.
On a GAAP basis, net income for the quarter increased 24% year over year to $243 million, primarily due to top-line growth, strong operating results and lower share count. GAAP earnings from continuing operations increased to $2.02 per share from $1.63 in the year-ago quarter. Non-GAAP earnings improved 30.2% year over year to $2.11 per share, beating the Zacks Consensus Estimate of $2.04.
Quarterly revenues from product sales and services increased 10.6% year over year to $1,728 million, driven by strong growth across all three segments. The top line surpassed the Zacks Consensus Estimate of $1,703 million.
Revenues from Communication Systems segment came in at $568 million, up 18.6% year over year, led by growth in Tactical Communications and Public Safety. Operating income grew 19.4% year over year to $172 million owing to volume and operational efficiencies.
Revenues from Electronic Systems unit were $649 million, up 7.1% year over year, supported by strong growth on long-term platforms — F-35, F/A-18 and F-16, and owing to increased volume in release systems, partly offset by the United Arab Emirates program transition timing. Operating income for the segment was $123 million, up 13.9% year over year.
Revenues from Space and Intelligence Systems unit increased 6.6% year over year to $514 million, owing to growth in classified programs, driven by small satellites, exquisite systems and next-generation technology programs. Operating income was up 4.8% year over year to $87 million due to higher volume and strong program execution, partly offset by higher investments.
The approval of shareholders for the L3 Harris transaction and Harris’ inking an agreement to divest the Night Vision business has reiterated its confidence in closing the transformational merger in the middle of calendar year 2019. The all-stock-merger-of-equals transaction aims to create a global defense technology leader with the combined entity being the sixth largest defense company in the United States and a top 10 defense company globally.
Cash Flow and Liquidity
During the first nine months of fiscal 2019, Harris generated $874 million of net cash from operating activities compared with $230 million in the year-ago period. During the same period, it generated $788 million of adjusted free cash flow compared with $451 million in the year-ago period. At the end of third-quarter fiscal 2019, the technology and communications company had $334 million in cash and equivalents with $3,412 million of net long-term debt. In the reported quarter, it paid down $300 million of debt. Harris returned $444 million to shareholders through dividends and share repurchases in the first nine months of fiscal 2019.
FY ‘19 Guidance Raised
Owing to strong fiscal third-quarter and year-to-date performance, Harris has raised its guidance for fiscal 2019. The company expects revenues to be around $6.72 billion, up 9% from fiscal 2018 (previously expected 8-8.5% revenue increase). GAAP earnings per share from continuing operations are anticipated to be about $7.80, up from the previous guidance range of $7.50 and $7.60. Non-GAAP earnings per share are anticipated to be about $8.15, up from the previous guidance range of $7.90 and $8.00.
Harris’ superlative performance is a testament of its strong fundamentals and healthy growth dynamics, due to high demand for security products amid geopolitical tensions. The merger with L3 would further augment its market position and lead to industry consolidation, offering it economies of scale while driving growth and creating value for shareholders. The long-term growth prospects of the company, therefore, appear quite enterprising.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 5.38% due to these changes.
At this time, Harris has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Harris has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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