Harris Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor, who is concerned about the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor’s only concern is the level of debt relative to the net current assets. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.
When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $3.39 in 2011 to only an estimated $3.51 for 2014. This level of demonstrated growth does not support the market’s implied estimate for earnings growth of 6.02% over the next 7-10 years. In fact, the historical growth is only around 0.68% per year, so the market is expecting a significant rise in earnings growth. The ModernGraham valuation model takes a more conservative approach and reduces the historical growth to a more conservative figure, assuming that some slowdown will occur. Therefore, the model returns an estimate of intrinsic value falling below the current price, indicating the company is overvalued at the present time.
Be sure to check out previous ModernGraham valuations of Harris Corporation (HRS)Â for a greater perspective!
Disclaimer: The author did not hold a position in Harris Corporation (HRS)Â at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.