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Why Is L3Harris (LHX) Up 19.3% Since Last Earnings Report?

A month has gone by since the last earnings report for L3Harris (LHX). Shares have added about 19.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is L3Harris due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

L3Harris Technologies Beats on Q3 Earnings, Tweaks View

L3Harris Technologies third-quarter 2020 adjusted earnings came in at $2.84 per share, which surpassed the Zacks Consensus Estimate of $2.72 by 4.4%. The bottom line increased 10% from the year-ago quarter’s $2.58.

Including one-time items, the company reported GAAP earnings of $1.99 per share compared with $1.90 in the year-ago quarter.

The year-over-year upside in GAAP earnings can be attributed to operational excellence, integration benefits, a decrease in integration costs and lower share count.

Total Revenues

In the quarter under review, the company’s revenues came in at $4,463 million, lagging the Zacks Consensus Estimate of $4,497 million by 0.8%. However, revenues inched up 0.7% on a year-over-year basis, driven by growth in core U.S. and international businesses.

Organic revenues increased 4.4% during the reported quarter.

Segmental Performance

Integrated Mission Systems: Net revenues at the segment came in at $1,372 million, up 6.2% year over year, driven by strong growth in Maritime from a ramp in manned and classified platforms. Also, growth in ISR driven by aircraft missionization demand contributed to this unit’s top-line growth.

Operating income improved 21% year over year to $213 million while operating margin expanded 190 basis points (bps) to 15.5%.

Space and Airborne Systems: The segment recorded net revenues of $1,249 million in the third quarter, up 6.5% year over year. This upside was driven by a ramp up in F-35 platform in Mission Avionics and classified growth in Intel and Cyber.

Operating income increased 0.4% to $231 million, while operating margin contracted 110 bps to 18.5%.

Communication Systems: Net revenues at the segment rose 6% to $1,094 million, driven by growth in Tactical Communications, primarily due to strong demand in the Middle East, Europe and Asia Pacific. Also continued ramp up in U.S. DoD modernization that benefited Integrated Vision Systems contributed to this unit’s revenue growth.

Operating income increased 17% to $273 million. Operating margin expanded 230 bps to 25%.

Aviation Systems: Net revenues declined 16% to $792 million on account of COVID-19-related impacts in the commercial aviation business.

Operating income decreased 21% to $100 million, while operating margin contracted 80 bps to 12.6%.

Financial Position

As of Oct 2, 2020, L3Harris had $1,341 million in cash and cash equivalents compared with $824 million as of Jan 3, 2020.

Long-term debt as of Oct 2, 2020 was $6,261 million compared with $6,694 million as of Jan 3, 2020.

Net cash inflow from operating activities amounted to $2,092 million at the end of third-quarter 2020 compared with the year-ago cash inflow of $797 million.

2020 View

L3Harris made some changes to its 2020 guidance. The company currently expects to generate organic revenues of 4% on a pro-forma basis and revenues of $18.4 billion. Earlier, the company projected its organic revenues to grow in the range of 3-5% and revenues in the range of $18.2-$18.6 billion. The Zacks Consensus Estimate for revenues of $18.5 billion is slightly above the company provided range.

Adjusted earnings per share for 2020 are currently projected to be $11.55, compared with the earlier guided range of $11.15-$11.55. The Zacks Consensus Estimate for earnings of $11.43 lies below the company’s guidance.

The company has increased its GAAP EPS guidance to $6.44 from the prior guided range of $6.03-$6.43.

Operating cash flow and adjusted free cash flow are now expected to be in the range of $2.82-$2.87 billion and $2.65-$2.70 billion, respectively. Earlier, operating cash flow and adjusted free cash flow were expected in the range of $2.8-$2.9 billion and $2.6-$2.7 billion, respectively.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month.

VGM Scores

Currently, L3Harris has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

L3Harris has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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