HRS Harris Corp.

Harris Corp. (HRS), a leading telecommunications equipment manufacturer for the defense sector, has received a $235 million contract to supply its innovative Falcon III tactical radio system to the Australian Department of Defense. Currently, Australian Defense Ministry is working on a project to develop a fully networked Australian arms brigade in 2013. Falcon III will provide Australia’s armed forces with reliable and secure Type-1 tactical voice and data communications.

We believe Australian contract is most important for Harris since the defense contractors in the U.S. are facing sales pressure due to gradual reduction of military spending by the U.S. government. The defense Department has decided to squeeze its budget by nearly $500 billion over the next decade. Yesterday, Harris slashed its full-year sales forecast to about $6 billion from its prior range of $6.15 billion to $6.3 billion, together with its second quarter of fiscal 2012 financial report.

As a leading government electronics supplier, Harris is benefiting from the strong International market conditions. In fact, emerging economies like Brazil, Russia, India, and China together with Latin America, Asia Pacific, and Africa regions paved the way for the company’s long-run growth. Harris has a sustainable and diversified product pipeline with a potential market size of $15 billion. International market opportunities are supplementing very well for any deficiency in the domestic U.S. market.

Strong momentum in the RF Communications segment will continue in the future since Harris’ next-generation Falcon III tactical radio is receiving increasing market traction. At the end of the previous quarter, order backlog came in at $1.252 billion including $581 million in Tactical Radio Communications. Tactical radios constitute $3.3 billion pipeline opportunity.

Accretive share repurchase plan coupled with huge order backlogs will act as positive catalysts for the stock going forward. However, intense competition from the likes of  ViaSat Inc. (VSAT), General Dynamics Corp. (GD) and Globecomm Systems Inc. (GCOM) will put Harris on the back foot. We thus maintain our long-term Neutral recommendation on the stock. Currently, Harris Corporationhas a Zacks #4 Rank, implying a short-term Sell rating.

 
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