Partnerships With Palantir And AI Start-ups Will Drive Future Market Differentiation

Key Takeaways

• Strategic partnerships and significant defense contracts ensure long-term growth and enhanced market differentiation.
  
• Successful operational efficiencies and robust share repurchase plans could improve margins and earnings per share.
  
• Budget constraints and fixed-price contracts pose financial risks, potentially affecting growth, margins, and revenue stability amidst ongoing integration and regulatory uncertainties.

Catalysts

Provides mission-critical solutions for government and commercial customers worldwide.

• L3Harris Technologies' strategic partnerships with companies like Palantir and venture-backed start-ups in AI and emerging technologies enhance innovation and speed, potentially increasing future revenue through advanced product offerings and market differentiation.
  
• Winning significant defense contracts such as the Next-Gen Jammer and Glide Phase Interceptor positions L3Harris for stable, long-term revenue growth in aerospace and defense sectors.
  
• The LHX NeXt initiative has successfully exceeded cost savings targets, likely leading to improved net margins through 2025 by enhancing operational efficiencies across the organization.
  
• International demand for products like software-defined radios and night-vision goggles is growing, which may drive increased revenue from global defense budgets, further supported by geopolitical tensions.
  
• The company plans to maintain a significant share repurchase program, aiming to repurchase at least $1 billion of shares in 2025, which could bolster earnings per share by reducing the number of outstanding shares.

L3Harris Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming L3Harris Technologies's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.0% today to 10.3% in 3 years time.
• Analysts expect earnings to reach $2.5 billion (and earnings per share of $13.78) by about March 2028, up from $1.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.7 billion in earnings, and the most bearish expecting $2.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, down from 26.6x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 33.3x.
• Analysts expect the number of shares outstanding to decline by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

L3Harris Technologies Future Earnings Per Share Growth

Risks

• L3Harris Technologies faces budgetary constraints in its space sector, which are expected to impact growth until 2026. This could affect the revenue growth rate and delay potential projects.
  
• Challenges on some fixed-price development programs in space have impacted the operating margins, due to being in the later stages of completion. This adds risk to overall earnings stability.
  
• The ongoing post-merger integration efforts and cost-saving initiatives such as LHX NeXt, while beneficial in reducing costs, could lead to disruptions or execution risks potentially affecting margins if not managed correctly.
  
• There is uncertainty regarding the effects of new U.S. government executive orders on contract bookings and revenue, specifically affecting Communication Systems, which could impact overall revenues.
  
• Fixed-price development contracts, especially in legacy programs, pose financial risks due to potential budget overruns which could affect margins; certain programs have already accumulated $100 million in negative adjustments.

Valuation

• The analysts have a consensus price target of $257.58 for L3Harris Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $324.0, and the most bearish reporting a price target of just $198.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $24.0 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 7.0%.
• Given the current share price of $212.56, the analyst price target of $257.58 is 17.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.