US Defense Initiatives Will Advance Missile And Communication Capabilities

Key Takeaways

• Increased U.S. defense budget and international demand could bolster L3Harris's revenue growth through enhanced funding and strong market positioning.
  
• LHX NeXt and strategic partnerships in AI and communications likely to improve efficiency and expand market reach, driving margin and earnings growth.
  
• Reliance on external contractors and fixed-price contracts pose risks, while geopolitical tensions and budget constraints threaten revenue and growth for L3Harris.

Catalysts

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

• The U.S. defense budget is expected to grow, with new defense initiatives and a potential increase in funding that could benefit L3Harris, supporting revenue growth.
  
• L3Harris is well-positioned in several key growth areas, such as missile warning and tracking, due to recent investments and capability alignment, likely increasing future revenue.
  
• International demand, especially from NATO allies for advanced communication solutions, is expected to continue strong, supporting revenue growth.
  
• The company's LHX NeXt initiative focuses on cost optimization and efficiency, leading to potential net margin improvements.
  
• Strategic collaborations and partnerships, particularly in AI and resilient communications, are expected to expand L3Harris's market reach and potentially drive future earnings growth.

L3Harris Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming L3Harris Technologies's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.6% today to 10.6% in 3 years time.
• Analysts expect earnings to reach $2.6 billion (and earnings per share of $14.07) by about May 2028, up from $1.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, down from 25.2x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 1.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

L3Harris Technologies Future Earnings Per Share Growth

Risks

• The need for L3Harris to depend on the performance of other contractors, especially on MDAPs where they are a subcontractor, creates significant dependency risks that could impact their timing and efficiency in project completion, potentially affecting revenues.
  
• Concerns about political and economic tensions between the U.S. and European allies may pose a risk to L3Harris’s international revenues, particularly in communications and defense technology.
  
• The transition of the F-35 TR-3 mission computing hardware from development to production highlights potential volume concerns that could risk affecting segment revenues and margins.
  
• L3Harris is engaged in fixed-price development contracts, which carry higher risk of technological and financial challenges, potentially impacting profit margins and earnings.
  
• Budget constraints within the U.S. government, particularly in the space sector, may affect future revenues and could delay expected growth, impacting overall financial targets.

Valuation

• The analysts have a consensus price target of $256.898 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 $212.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $24.1 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 7.2%.
• Given the current share price of $216.19, the analyst price target of $256.9 is 15.8% 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.