LHX L3Harris
Quality defense prime with a munitions and space tailwind; fair value sits modestly below today's price.
The story
L3Harris is a scaled US defense prime spanning space sensors, tactical radios, electronic warfare and, since Aerojet Rocketdyne, solid rocket motors. It sits on structurally rising demand for munitions, missile defense (Golden Dome) and space. Its moat comes from incumbency on classified and long-cycle programs, sole-source propulsion and high switching costs. It is a mature franchise whose GAAP margins are depressed by acquisition amortization and fixed-price program charges, and whose LHX NeXt cost program is lifting margins toward peer levels.
Growth of about 6% fades to 3%, supported by a record backlog and missile/space budgets but capped by US defense budget growth. The 15% GAAP margin target reflects management's ~16% segment-margin goal net of intangible amortization rolling off, not a peak. The reported 0.75 sales-to-capital is distorted by goodwill, so incremental capital efficiency is set at 1.8, and beta is below the 1.2 aerospace anchor because government-funded cash flows are low-cyclical.
Value drivers
| Revenue growth (Y1) | 6.0% |
| Terminal growth | 3.0% |
| Forecast horizon | 8y |
| Target operating margin | 15.0% |
| Years to target margin | 5 |
| Sales-to-capital | 1.80 |
| Beta | 0.90 |
| Failure probability | 1.0% |
| Cost of capital (WACC) | 8.8% |
| Terminal WACC | 9.2% |
Valuation bridge
| PV of explicit FCFF | 14.75B |
| PV of terminal value | 23.17B |
| Equity value | 28.33B |
| ÷ shares → per share | $152.13 |
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 24.31B | 6.0% | 12.8% | 2.59B | 764.40M | 1.82B | 1.67B |
| 2 | 25.66B | 5.6% | 13.3% | 2.85B | 752.39M | 2.09B | 1.77B |
| 3 | 26.98B | 5.1% | 13.9% | 3.12B | 733.21M | 2.38B | 1.85B |
| 4 | 28.25B | 4.7% | 14.4% | 3.39B | 706.67M | 2.69B | 1.92B |
| 5 | 29.46B | 4.3% | 15.0% | 3.67B | 672.71M | 3.00B | 1.97B |
| 6 | 30.60B | 3.9% | 15.0% | 3.82B | 631.39M | 3.18B | 1.92B |
| 7 | 31.65B | 3.4% | 15.0% | 3.95B | 582.88M | 3.36B | 1.86B |
| 8 | 32.60B | 3.0% | 15.0% | 4.06B | 527.51M | 3.54B | 1.80B |
Key risks
- Fixed-price development overruns (space, propulsion) driving further charges
- US budget gridlock or continuing resolutions delaying awards
- Solid rocket motor ramp execution and capacity capex exceeding plan
Catalysts
- Golden Dome and missile-defense awards for space sensors and propulsion
- Margin expansion from LHX NeXt savings and amortization roll-off lifting GAAP EPS and FCF