L3Harris –LHX $182.50 MV $40bn EV $47.5bn
COMPANY DESCRIPTION:
LHX is a global defense technology-company trading a discount to its multi-year
growth outlook, a discount to the market along with higher cash return metrics than
the market.
LHX was formed by the merger of L3 and Harris. Well-respected COO Chris
Kubasik of L3 (former CFO and COO at LMT) operates the businesses and
becomes CEO in 2022. Kubasik has had great success at L3 and should be able to
accelerate margin and cash flow improvement at merged Harris. We expect
Kubasik to achieve better working capital metrics to drive FCF conversion. We
also expect upside to synergy targets from the L3 deal.
LHX businesses include:
o Communication systems (32% of EBIT) includes tactical
communications, secured networking, radio/safety applications and
integrated vision systems (helmet/weapon mounted).
o Space and Airborne Systems (30%) includes space payloads/sensors,
optical wireless networks, avionics electronics and sensors and electronic
warfare-threat warning and countermeasure systems.
o Integrated Mission systems (22%) includes air targeting systems, naval
electronic platforms, laser imaging and targeting systems).
o Aviation Systems (16%) includes precision weapon, components, airport
security and detection solutions, aviation simulation, training and pilot
training and communications infrastructure systems.
VALUATION:
The stock trades at a 25% discount to the S&P at 14x 2021 EPS, despite
sustainable low double digit EPS growth over the next 3-5 years.
Cash return of 5%-7% per year includes a growing 2% dividend yield and 3%-5%
repurchase at current 9% 2021 FCF yield and under 2x leverage.
Free cash should grow 15%-20% per year as cash conversion exceeds net income.
We think LHX could achieve free cash per share of $16-$17 in 2022 from $12 in
2020.
ESTIMATES:
