We downgrade our recommendation for Harris Corp. (HRS) to Neutral, which means the stock will perform in line with the broader market. The stock price has moved up nearly 84% in the last one year and is currently trading at the high-end of its 52-week price range. Harris depends on the U.S. Government contracts for a major part of its revenue. In future, Federal budgetary pressures may result in deeper than expected cuts in defense spending, which may significantly impact the company’s business prospects.
Market opportunities for Harris’ telecom products and services depend on several factors including competition, network coverage and requirements, and overall growth of economies within different geographical regions. Competition intensified in the video infrastructure and digital media solutions market. Harris’ Broadcast Communications segment that develops digital and high-definition media products is yet to recover from weak global economic conditions. Throughout fiscal 2009, this segment suffered severely as cable TV and satellite service providers in Latin America, Asia, and Africa significantly reduces their capital spending.
According to our view, Harris will benefit from higher defense expenditure by the U.S. government coupled with new expansion drives in the Asian, European & African markets. We anticipate strong demand to continue for Harris’ tactical radio systems both from international and domestic sources. However, we also believe that these positives have been already reflected in the current valuation, leaving little room for above-market gains.
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