During the October 7 lightning round of Mad Money, a caller asked whether they were “crazy” to consider starting a position in L3Harris Technologies, Inc. (NYSE:LHX). Jim Cramer responded:
No, actually, I kind of like L3Harris, to tell you the truth. I’ve actually been looking at it, and I’ve been saying this: it just isn’t that bad. I mean, it sells at like 10 times or eight. Well, no, it’s got a discount to the S&P multiple, but it just shouldn’t be going down and down and down.
He recommended building a position gradually rather than attempting to identify the exact bottom:
Where do you pick a bottom? I don’t know. We talk about this a lot at the Club. How do you pick a bottom in a stock like L3Harris? You don’t. Say you want to buy 100 shares, buy 25 here, and then you use three, five-point increments to be able to get it. It’s a $230 stock. You divide it by 10; look at it like a $23 stock. Buy your first at 23, and then you buy it down to 20. And I think you’re going to find you got… a really good basis.
L3Harris Technologies (LHX) ranks seventh on our list of 10 Best Defense Stocks to Buy in the S&P 500. See which six defense stocks attracted greater hedge fund interest and ranked ahead of LHX.
Orders and Cash Flow Give Investors Something to Work With
L3Harris Technologies, Inc. reported second-quarter orders of $7.3 billion and a book-to-bill ratio of 1.2x, taking backlog to a record $42 billion. Revenue increased 8% to approximately $5.9 billion, while diluted EPS rose 28% to $3.13. Free cash flow increased 37% to $771 million.
Missile Solutions revenue grew 14% to approximately $1.05 billion, supported by increased production and development activity. Communications & Spectrum Dominance also improved, with its operating margin rising to 26.9% from 24.6%. These gains could possibly provide a financial basis for Cramer’s interest despite the stock’s weakness. A $60 million Air Force sensor award offers a smaller example of that demand. Its significance depends on where it fits within L3Harris’s missile business, rather than the headline amount alone.
A Lower Share Price Does Not Remove Contract Risk
Defense orders take time to convert into profitable deliveries. L3Harris Technologies, Inc. mentioned that fixed-price contracts can produce losses if costs exceed estimates and the company cannot obtain adjustments. Inflation, execution problems, and production expenses therefore remain relevant even when demand is strong.
The latest quarter also showed differences across segments. Space & Mission Systems’ operating margin fell to 9.8% from 10.4%, primarily because the prior year included an asset-sale gain. Missile Solutions’ margin declined slightly to 12.3% from 12.5%, showing the absence of a favorable prior-year contract resolution. L3Harris’s space work also connects it with a much faster-growing company with a different financial profile. Their satellite agreement raises the question of which side offers the more attractive way to invest in the same mission.
Current comparisons are materially higher. L3Harris trades at approximately 18.7x forward earnings, versus 16.5x for Lockheed Martin and 16.6x for Northrop Grumman. It highlights that L3Harris does not trade at a discount to these two major defense peers.
Fund Participation Slipped as Cramer Considered Buying
According to Insider Monkey, 56 hedge funds held L3Harris Technologies, Inc. in Q2, compared with 59 in Q1. D E Shaw increased its stake in the company by a massive 5204% to 1.05 million shares, becoming the largest hedge fund holder of the company in Q2. Short interest was 2.75% of the public float. The decline in holders was modest, and the short position does not suggest unusually concentrated bearish positioning.
The stock’s weakness has not always followed a deterioration in its earnings outlook. L3Harris fell 4.6% after a leadership change despite reaffirming guidance, leaving a question that unchanged financial targets could not settle. Cramer’s approach acknowledges that a sound business can remain an unpopular stock. L3Harris has growing orders and stronger cash generation, but its valuation is not exceptionally low against close competitors. His preference for buying in stages leaves room for continued weakness while the company works through its backlog.
READ NEXT: Jim Cramer Doubles Down on Avoiding NextEra Energy (NEE) and Jim Cramer Sees an Investment Case Taking Shape at Avery Dennison (AVY).
