Why Is L3Harris (LHX) Up 9.9% Since Last Earnings Report?
It has been about a month since the last earnings report for L3Harris (LHX). Shares have added about 9.9% 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 the most recent earnings report in order to get a better handle on the important drivers.
L3Harris Technologies Q1 Earnings Beat, EPS View Cut
L3Harris Technologies’ first-quarter 2020 adjusted earnings came in at $2.80 per share, which surpassed the Zacks Consensus Estimate of $2.61 by 7.3%. The bottom line also increased 20.7% from the year-ago quarter’s $2.32.
Including one-time items, the company reported GAAP earnings of 99 cents per share compared with $1.75 in the year-ago quarter.
The year-over-year downside can be attributed to an impairment of goodwill and other assets and other COVID-19 related charges, amortization of merger intangibles and a less favorable program mix.
Total Revenues
In the quarter under review, the company’s revenues came in at $4,626 million, exceeding the Zacks Consensus Estimate of $4,590 million by 0.8%. Revenues surged 168% on a year over year basis, driven by post-merger inclusion of L3 operations.
Segmental Performance
Integrated Mission Systems: Net sales at the segment came in at $1,370 million. On a pro forma basis, revenues were up 1% on growth in Maritime.
Operating income came in at $201 million compared with $165 million in the year-ago quarter. Moreover, operating margin expanded 260 basis points (bps) to 14.7%.
Space and Airborne Systems: The segment recorded net sales of $1,192 million in the first quarter, up 25% year over year. On a pro-forma basis, revenues increased 7% year over year driven by a ramp up in modernization on the F-35 platform in Avionics and classified growth in Intel and Cyber.
Operating income increased to $221 million from $198 million in the year-ago quarter. Operating margin contracted 70 bps to 18.5%.
Communication Systems: Net sales at the segment rose 89% to $1,094 million.On a pro- forma basis, revenues increased 5% year over year due to ramp up in U.S. DoD modernization programs in Tactical Communications.
Operating income increased to $250 million from $226 million in the year-ago quarter. Operating margin expanded 120 bps to 22.9%.
Aviation Systems: Net sales at the segment came in at $1,011 million, up 11% on a pro-forma basis, driven by Defense Aviation Products and Mission Networks.
Operating income increased to $147million from $105 million. Operating margin expanded 300 bps to 14.5%.
Financial Position
As of Apr 3, 2020, L3Harris had $663 million in cash and cash equivalents compared with $824 million as of Jan 3, 2020.
Long-term debt as of Apr 3, 2020 was $6,294 million compared with $6,694 million as of Jan 3, 2020.
Net cash inflow from operating activities amounted to $533 million at the end of first-quarter 2020 compared with the year-ago cash inflow of $405 million.
2020 View
Considering the impacts of the COVID-19 pandemic, L3Harris made some changes to its 2020 guidance. The company now expects organic revenues to grow in the range of 3-5%, compared with the prior band of 5-7%.
The company currently projects revenues in the range of $18.3-$18.6 billion. The Zacks Consensus Estimate for revenues of $19.08 billion lies above the company provided guidance range.
Adjusted earnings per share for 2020 are now projected in the range of $11.15-$11.55, lower than the prior band of $11.35-$11.75. The Zacks Consensus Estimate for earningsof $11.07 lies below the guidance range. .
Operating cash flow and adjusted free cash flow are still expected in the range of $2.8-$2.9 billion and$2.6-$2.7 billion, respectively.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -6.32% due to these changes.
VGM Scores
At this time, 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
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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