Despite Its High P/E Ratio, Is L3Harris Technologies, Inc. (NYSE:LHX) Still Undervalued?

November 28, 2019

This article is for investors who would like to improve their understanding of price to earnings ratios (P/E ratios). We'll look at L3Harris Technologies, Inc.'s (NYSE:LHX) P/E ratio and reflect on what it tells us about the company's share price. Based on the last twelve months, L3Harris Technologies's P/E ratio is 24.81. That corresponds to an earnings yield of approximately 4.0%.

View our latest analysis for L3Harris Technologies

How Do You Calculate L3Harris Technologies's P/E Ratio?

The formula for P/E is:

Price to Earnings Ratio = Share Price ÷ Earnings per Share (EPS)

Or for L3Harris Technologies:

P/E of 24.81 = $200.50 ÷ $8.08 (Based on the year to September 2019.)

Is A High Price-to-Earnings Ratio Good?

The higher the P/E ratio, the higher the price tag of a business, relative to its trailing earnings. That isn't a good or a bad thing on its own, but a high P/E means that buyers have a higher opinion of the business's prospects, relative to stocks with a lower P/E.

Does L3Harris Technologies Have A Relatively High Or Low P/E For Its Industry?

The P/E ratio indicates whether the market has higher or lower expectations of a company. You can see in the image below that the average P/E (21.4) for companies in the aerospace & defense industry is lower than L3Harris Technologies's P/E.

NYSE:LHX Price Estimation Relative to Market, November 29th 2019

L3Harris Technologies's P/E tells us that market participants think the company will perform better than its industry peers, going forward.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Notably, L3Harris Technologies grew EPS by a whopping 28% in the last year. And its annual EPS growth rate over 5 years is 9.9%. With that performance, I would expect it to have an above average P/E ratio. The market might expect further growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

One drawback of using a P/E ratio is that it considers market capitalization, but not the balance sheet. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

L3Harris Technologies's Balance Sheet

L3Harris Technologies has net debt worth 13% of its market capitalization. That's enough debt to impact the P/E ratio a little; so keep it in mind if you're comparing it to companies without debt.

The Bottom Line On L3Harris Technologies's P/E Ratio

L3Harris Technologies has a P/E of 24.8. That's higher than the average in its market, which is 18.3. Its debt levels do not imperil its balance sheet and it is growing EPS strongly. So on this analysis it seems reasonable that its P/E ratio is above average.

Investors should be looking to buy stocks that the market is wrong about. If the reality for a company is better than it expects, you can make money by buying and holding for the long term. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

Of course you might be able to find a better stock than L3Harris Technologies. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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