Recent Zacks Consensus Earning Estimate Revision trend is clearly indicating a rosy picture for Harris Corp. (HRS). Analysts have become very optimistic regarding Harris’ future growth due to strong demand for its tactical radio products, several government communications products and excellent operating efficiency. All these positive factors resulted in an extremely favorable earning revision trend for the company.
Third Quarter Fiscal 2010 Highlights
Harris’ third quarter EPS exceeds the Zacks Consensus Estimate by 4 cents, and revenue increased 10.3% year over year. This was mainly due to strong performance of RF communications and Government Communications Systems businesses. Total orders in the third quarter were $1.45 billion, up 40.8% year over year.
Notable successes include the company’s Falcon II & Falcon III tactical radios, which are being widely used by U.S. Special Operations forces, the U.S. Army and various NATO and “Partnership for Peace” countries. At the end of the third quarter of fiscal 2010, the company had $1.02 billion of order backlog for tactical radios. Harris estimated that its full fiscal 2010 revenue from tactical radio will be between $1.4 – $1.5 billion.
Agreement of Analysts
Out of 14 analysts covering the stock, in last 30 days 10 analysts have upwardly revised their estimates for the ensuing fourth quarter of fiscal 2010. Just 1 analyst moved in the other direction. For the following quarter, 7 out of 9 analysts covering the stock raised their estimates and there have been no downward revisions. Furthermore, 9 analysts upwardly revised their estimates for both fiscal 2010 and fiscal 2011 and just 1 analyst reduced estimates for full fiscal 2011.
Harris has a strong market position in the government communications sector, with a broad product line and an enviable win rate on government contracts (over 60% historically). The two defense electronics divisions (Government Communications and RF Communications) are expected to see a noticeable pickup in the next couple of years as overall defense spending is likely to remain firm and a major effort to upgrade the military’s communications infrastructure becomes a priority.
We believe analysts are primarily convinced by the above mentioned positive factors. Currently, the Zacks Consensus EPS Estimate for the fourth quarter is $1.22. If that materializes, it would result in substantial growth of 34.2% year-over-year. Similarly, for the first quarter of fiscal 2011, the current Zacks Consensus EPS Estimate of $1.21 indicates a whopping gain of 45.9% year-over-year.
Magnitude of Estimate Revisions
In synergy with the strong upward revision of estimates recently, the Zacks Consensus Estimate has moved up by 6 cents, in the last 30 days, for the ensuing fourth quarter and that of by 16 cents for the following quarter. Accordingly, for full fiscal 2010, the Zacks Consensus Estimate moved up by 9 cents in the last 30 days and up 39 cents for full fiscal 2011.
Earning Surprises
With respect to earnings surprises, the company’s fairly good track record is expected to persist in the coming quarters. Harris produced an impressive average earnings surprise of 9.56% in the last four quarters. Current Zacks Consensus Estimates for both the ongoing quarter and the following quarter contain 1.65% upside potential (essentially a proxy for future earning surprises).
Remain Neutral on Harris
As a leading government electronics supplier, Harris is benefiting from the increase in U.S. defense expenditure. The company has a sustainable and diversified product pipeline with a potential market size of $15 billion. Harris will benefit from higher defense expenditure by the U.S. government coupled with new expansion drives in the Asian, European & African markets.
Nevertheless, the stock price moved up significantly (88%) during the past year, which we believe may restrict any above-market movement in the near-term. We thus maintain our Neutral recommendation.
Read the full analyst report on “HRS”
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