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Harris Corp Valuation – December 2018 $HRS

Company Profile (excerpt from Reuters): Harris Corporation, incorporated on December 6, 1926, is a technology company that provides products, systems and services that have defense and civil government applications, as well as commercial applications. The Company offers its products and services to government and commercial customer. The Company operates in four segments: Communication Systems, which serves markets in tactical communications and defense, and public safety networks; Space and Intelligence Systems, which provides complete Earth observation, environmental, geospatial, space protection, and intelligence solutions from advanced sensors and payloads, as well as ground processing and information analytics; Electronic Systems, which offers a portfolio of solutions in electronic warfare, avionics, wireless technology, command, control, communications, computers and intelligence (C4I) and undersea systems, and Critical Networks, which provides managed services supporting air traffic management, energy and maritime communications, and ground network operation and sustainment, as well as information technology (IT) and engineering services.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of HRS – December 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $16,342,125,676 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.17 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 99.89% Pass
6. Moderate PEmg Ratio PEmg < 20 24.58 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.17 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.17 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 10.27 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $5.66
MG Growth Estimate 14.26%
MG Value $209.33
Opinion Undervalued
MG Grade C-
MG Value based on 3% Growth $82.01
MG Value based on 0% Growth $48.08
Market Implied Growth Rate 8.04%
Current Price $139.04
% of Intrinsic Value 66.42%

Harris Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.9 in 2015 to an estimated $5.66 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.04% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Harris Corporation revealed the company was trading above its Graham Number of $70.7. The company pays a dividend of $2.28 per share, for a yield of 1.6% Its PEmg (price over earnings per share – ModernGraham) was 24.58, which was below the industry average of 30.21, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-36.13.

Harris Corporation receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$36.13
Graham Number $70.70
PEmg 24.58
Current Ratio 1.17
PB Ratio 5.17
Current Dividend $2.28
Dividend Yield 1.64%
Number of Consecutive Years of Dividend Growth 17

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2018
Total Current Assets $2,288,000,000
Total Current Liabilities $1,956,000,000
Long-Term Debt $3,410,000,000
Total Assets $9,889,000,000
Intangible Assets $6,333,000,000
Total Liabilities $6,645,000,000
Shares Outstanding (Diluted Average) 120,600,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.91
Jun2018 $5.92
Jun2017 $4.44
Jun2016 $2.59
Jun2015 $3.11
Jun2014 $4.95
Jun2013 $1.01
Jun2012 $0.26
Jun2011 $4.60
Jun2010 $4.28
Jun2009 $0.28
Jun2008 $3.26
Jun2007 $3.43
Jun2006 $1.71
Jun2005 $1.46
Jun2004 $0.97
Jun2003 $0.45
Jun2002 $0.62
Jun2001 $0.16
Jun2000 $0.13
Jun1999 $0.34

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.66
Jun2018 $4.42
Jun2017 $3.52
Jun2016 $2.83
Jun2015 $2.90
Jun2014 $2.87
Jun2013 $1.92
Jun2012 $2.42
Jun2011 $3.39
Jun2010 $2.72
Jun2009 $1.97
Jun2008 $2.60
Jun2007 $2.05
Jun2006 $1.25
Jun2005 $0.93
Jun2004 $0.60
Jun2003 $0.39

Recommended Reading:

Other ModernGraham posts about the company

Harris Corporation Valuation – February 2018 $HRS
Harris Corporation Valuation – February 2016 $HRS
10 Best Stocks For Value Investors This Week – 9/26/15
Harris Corporation Analysis – September 2015 Update $HRS
Harris Corporation Analysis – June 2015 Update $HRS

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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