Boosting Future Growth, Aerojet Integration, Communication Innovations, And Shareholder Value Focus

Key Takeaways

• The integration of Aerojet Rocketdyne and focus on resilient communication products promise future revenue growth through market expansion and advanced technology demand.
  
• Strategic investments in optimization and focus on shareholder value through debt paydown and share repurchases are likely to enhance operational efficiencies and EPS growth.
  
• Reliance on government contracts, acquisition integration risks, geopolitical hurdles in international markets, and competitive pressures in communications may affect financial performance.

Catalysts

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

• The successful integration of Aerojet Rocketdyne enhances L3Harris's missile platform content and expansion into new markets, likely boosting future revenue growth through increased demand for their advanced propulsion technology and innovative attitude control systems.
  
• Focus on delivering resilient communication products to DoD and international customers, supported by a record backlog of over $6 billion in the Communications Systems segment, is expected to drive revenue growth, especially with the rising demand for software-defined radios and seamless resilient communications.
  
• Strategic investments in workforce and infrastructure optimization under the LHX NeXt initiative, particularly in IT infrastructure modernization, supply chain management, and facility expansions, are expected to improve operational efficiencies, thereby potentially expanding net margins.
  
• Prioritization of debt paydown and share repurchases, with over $300 million returned to shareholders through dividends and share buybacks in the quarter and a target of approximately $500 million in share repurchases for 2024, indicates a strong focus on shareholder value, which could contribute to earnings per share (EPS) growth.
  
• Implementation of disciplined bidding processes and enhanced program management and execution, as evidenced by the improvement in overdue deliveries and segment operating margins, suggests operational improvements that may enhance profitability and competitiveness, thus potentially impacting net margins and earnings positively in the future.

Assumptions

• Analysts are assuming L3Harris Technologies's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 10.1% in 3 years time.
• Analysts expect earnings to reach $2.4 billion (and earnings per share of $13.07) by about August 2027, up from $1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.6 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 24.4x on those 2027 earnings, down from 36.0x 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 grow by 0.3% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.27%, as per the Simply Wall St company report.

Risks

• Dependence on government contracts and the cyclical nature of defense spending could lead to variability in revenues and earnings.
  
• Execution risks associated with integrating acquisitions, such as Aerojet Rocketdyne, which could affect margins if operational improvements do not materialize as planned.
  
• International sales opportunities, while a growth area, come with geopolitical and regulatory risks that could impact revenue.
  
• Supply chain optimization efforts (LHX NeXt program) carry execution risk. Failure to achieve expected cost savings could affect net margins.
  
• Competition in the communications systems segment, including for tactical radios, could pressure prices and margins if the company is unable to differentiate its offerings effectively.

Valuation

• The analysts have a consensus price target of $256.57 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 $185.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $23.7 billion, earnings will come to $2.4 billion, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $225.96, the analyst's price target of $256.57 is 11.9% 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.