HRS Harris Corp.

Harris Corp.(HRS) reported mixed third quarter 2011 financial results, where earnings per share (EPS) beat but revenues missed the Zacks Consensus Estimate.

Third Quarter Highlights

Consolidated revenue in the third quarter of 2011 was $1,413.3 million, which failed to beat the Zacks Consensus Estimate of $1,514.0 million but improved 6.3% year over year. The year-over-year revenue growth was primarily due to strong contribution from the Integrated Network Solution segment, slightly offset by the slowdown in the U.S. defense expenditure. Total orders generated in the third quarter were $1.55 billion compared with $1.45 billion in the prior-year quarter.

Reported GAAP net income in the quarter was $140 million or $1.09 per share compared with a net income of $166 million or $1.26 per share in the year-ago quarter, however, quarterly adjusted (excluding special charges) EPS of $1.16 surpassed the Zacks Consensus Estimate by a penny.

Cost of sales in third quarter 2011 was $896.3 million compared with $820 million reported in the prior-year quarter. Engineering, selling, & administrative expenses were $285.6 million versus $245 million in the year-ago quarter.

Agreements of Analysts

Out of the 13 analysts covering the stock in the last 7 days, only one analyst downwardly revised estimates for the fourth quarter of 2011, while none revised their estimates upward for the same period. Likewise, for the fourth quarter of 2011, out of the 10 analysts, one analyst decreased estimates, while none moved upward.

For fiscal 2011, out of the 13 analysts, only one analyst reduced estimates, while none moved in the opposite direction. Similarly, for fiscal 2012, none out of the 13 analysts revised their estimates.

Currently, the Zacks Consensus EPS Estimate for the fourth quarter of 2011 is pegged at $1.23 per share with a projected annual growth rate of negative 0.93%. Similarly, for the first quarter of 2012, the current Zacks Consensus EPS Estimate of $1.15 per share indicates a loss of 10.08% year over year.

Magnitude of Estimate Revisions

In synergy with the downward revision of estimates, during the last 7 days, the current Zacks Consensus Estimate for the fourth quarter of 2011 remained unchanged at $1.23. Likewise, for the first quarter of 2012, the current Zacks Consensus Estimate inched down by a penny to $1.15. Similarly, for fiscal 2011, in the last 7 days, the current Zacks Consensus Estimate dipped 1 cent to $4.87 while for fiscal 2012, the current Zacks Consensus Estimate remained flat at $5.07.

Earning Surprises

With respect to earnings surprises, the company notched up an average earnings surprise of 2.57% in the trailing four quarters. Both the ongoing quarter and the upcoming quarter contain an upside potential of (essentially a proxy for future earnings surprises) 0.00%. Likewise, for fiscal 2011 and fiscal 2012, Zacks Consensus Estimates upside potentials are 0.00% and 0.00%, respectively.

Our Recommendation

With huge cash availability, the company is focusing on inorganic growth. Recently, the company completed the acquisition ofGlobal Connectivity Services (GCS) business from Schlumberger Ltd. It has also acquired Carefx Corporation, a leading provider of interoperability workflow solutions. The acquisition of Carefx Corporation will give Harris a strong foothold in the commercial healthcare market.

However, competition from companies like Boeing Co. (BA), General Dynamics Corp. (GD) and Raytheon Co. (RTN) coupled with rising cost of production and slowdown in the U.S. defense expenditure is expected to put Harris on the back foot.

We thus maintain our long-term Neutral recommendation forHarris Corporation. Currently, Harris Corporationhas a Zacks #3 Rank, implying a short-term Hold rating on the stock.

 
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