Harris Corporation (HRS): This Stock Has a Lot to Talk About

Harris Corporation (NYSE:HRS) has been making the transition from a diversified electronics company to one that is focused on communications. The company is now an international communications and IT entity serving both government and commercial markets.

Harris Corporation (NYSE:HRS), along with all the major communications equipment companies, is facing several near-term concerns as the contraction of the U.S. and international defense expenditures threaten revenue. The big benefit to Harris, compared with major peers, is that its government communications systems segment makes up only 35% of revenue.

Harris is looking to hedge the negatives of defense budget cuts by emphasizing other businesses, including the IT transformation of the healthcare industry, public safety communications, and maritime communications. Harris Corporation (NYSE:HRS) should also benefit from local and federal government agencies that are focusing on improving the technological capabilities of communications systems.

Its integrated network-solutions segment provides mission-critical end-to-end IT services, standards-based healthcare inter-operability and image-management solutions, accounting for nearly 30% of the company’s revenue.

What’s more is its CapRock Communications acquisition has given the company a strong foothold in the energy market. CapRock provides managed satellite communications solutions for energy, government and maritime industries. Similarly, the acquisition of the Global Connectivity Services business from Schlumberger upped its capabilities in mission-critical satellite communications market.

Going into 2013, the hedge fund sentiment was positive for Harris Corporation (NYSE:HRS), with a total of 21 hedge funds long the stock, a 17% increase from the previous quarter. Michael Price’s MFP Investors has the most valuable position in Harris, worth close to $16 million, accounting for 2.3% of its total 13F portfolio.

What about the comps?

Motorola Solutions Inc (NYSE:MSI) is another provider of communication infrastructure and devices. However, its government segment, which includes sales from two-way radios and public safety systems, accounts for some 70% of revenue. This is a big negative considering recent budget cuts that will negatively impact government spending.

Motorola Solutions Inc (NYSE:MSI) also expects to generate $1 billion in cash from operations for this fiscal year, but this could be difficult given the company has generated only 50% of its target cash flow in the first nine months of this fiscal year.

Motorola Solutions Inc (NYSE:MSI) had some of the highest hedge fund interest going into 2013, with 35 hedge funds long the stock. Most notably ValueAct Capital has the largest position in Motorola Solutions, a $1.6 billion position that makes up 20.5% of its portfolio.

L-3 Communications Holdings, Inc. (NYSE:LLL) is a leading supplier of various products and services used in aerospace and defense platforms. Again, like Motorola Solutions, a large percentage of L-3’s business is generated within the U.S., with government and commercial sales accounting for over 80% of revenue.

The government’s plans to cut nearly half a billion dollars in defense spending over the next decade should have a profound impact on L-3’s performance. Going forward, L-3 Communications Holdings, Inc. (NYSE:LLL) is projecting its fiscal 2013 revenue to come in between $12.6 billion and $12.8 billion, compared to the $13.15 billion it posted last year. What’s more is that over half of L-3 Communications Holdings, Inc. (NYSE:LLL)’s sales come from fixed-priced contracts, where the company will only be able to make a profit if costs stay within the contracted cost.

	Harris	Exelis	Motorola Solutions	L-3
5-year operating cash flow growth	4.5%	-5%	6%	1%
5-year average return on investment	13.5%	11.6%	0%	8.6%

And currently, Harris has the industry’s top return on assets:

	Harris	Exelis	Motorola Solutions	L-3
Return on assets	10.3%	6.4%	7%	5.3%

Harris Corporation (NYSE:HRS) is quickly inserting itself as one of the top communications equipment companies. What I like about Harris is its solid dividend and impressive ability to generate returns for investors. Unlike other companies in the industry, Harris has less exposure to the government sector and a more diversified end market.