Transformational Acquisitions And AI Partnerships To Propel Aerospace Growth And Innovation

Key Takeaways

• Strategic acquisitions and partnerships bolster national security focus and adaptability, likely increasing market presence and boosting operational and net margins.
  
• Transformation initiatives and strong order volumes support substantial cost savings, profitability, and solid future revenue and EPS growth.
  
• L3Harris faces execution risks in acquisitions, political spending uncertainties, and competition pressures, potentially impacting revenue, margins, and market share.

Catalysts

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

• L3Harris' strategy of key acquisitions and divestitures, such as acquiring Aerojet Rocketdyne, is expected to reinforce its focus on national security, potentially expanding its market and increasing revenue.
  
• The company's unique ability to operate as a prime, sub, or merchant supplier with a flexible business model is anticipated to enhance its adaptability in meeting customer needs, likely boosting future operating margins.
  
• Strategic partnerships, like the one with Palantir, position L3Harris to capitalize on government mandates to increase the use of AI, which may drive revenue and improve net margins through efficient technological advancements.
  
• LHX NeXt transformation program is expected to push cost savings to exceed $1 billion, enhancing profitability and projected to improve segment operating margins to at least 16% by 2026.
  
• Robust order volumes and a growing backlog, exemplified by wins like the Next Generation Jammer contract and international radio contracts, are indicators of strong future revenue growth and potential EPS increases as these projects transition to production phases.

L3Harris Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming L3Harris Technologies's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 10.9% in 3 years time.
• Analysts expect earnings to reach $2.6 billion (and earnings per share of $13.91) by about November 2027, up from $1.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.1x on those 2027 earnings, down from 41.1x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 35.9x.
• Analysts expect the number of shares outstanding to decline by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.43%, as per the Simply Wall St company report.

L3Harris Technologies Future Earnings Per Share Growth

Risks

• The strategic investments and acquisitions by L3Harris, such as Aerojet Rocketdyne and Tactical Data Links, require diligent execution and risk management to deliver the expected revenue and earnings impact, which could be challenged by integration complexities or underperformance.
  
• Political and budgetary uncertainties, particularly in space program investments and government defense spending, could impact L3Harris’s anticipated revenue growth and profitability if anticipated funds and contracts are redirected or delayed.
  
• Classified space development program challenges and competition in advanced missile systems pose risks to operational performance and could negatively affect operating margins and earnings if not managed effectively.
  
• Rapid advancements in AI and new entrants in the defense technology sector may increase competition and pressure on L3Harris’s strategic positioning and market share, potentially impacting future revenue and earning capabilities.
  
• Cost reduction initiatives, while yielding short-term margin improvements, bear execution risk, and failure to realize anticipated savings could prevent L3Harris from achieving its projected operating margins and EPS targets.

Valuation

• The analysts have a consensus price target of $279.14 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 $206.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $24.3 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $261.65, the analyst's price target of $279.14 is 6.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.