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Which IT Firm Serving Defense Is Riding Tailwinds for Aerospace Electronics?


Resurgent commercial demand combined with a politically resilient defense budget will propel this undervalued stock to the front ranks of the aerospace sector.

As worldwide defense spending shows more strength than widely anticipated and the battered civilian aerospace market shakes off its slump, companies with long-time expertise in aircraft electronics will emerge as huge winners.

Harris Corp (NYSE:HRS), an international communications and information technology company, is well positioned to gain from these trends by virtue of its innovative products and client diversification.

Based in Melbourne, Florida, the company ($5.6 billion in market cap) is divided into three segments: Radio Frequency Communications, Integrated Network Solutions and Government Communications Systems.

What gives Harris long-term staying power is an approximate 50/50 split between commercial and government clients, which allows it to weather a slump in either sector. For the company's full fiscal year 2012 (ending in June), revenue reached $5.5 billion, roughly half from the commercial sector and the other half from government agencies including the Federal Aviation Administration (FAA) and the Pentagon. This dichotomy helped the company survive the brutal slowdown in commercial aviation, which is finally showing signs of easing.

Meanwhile, the military electronics market will be fueled over the next decade by expanding airlift operations worldwide and the corresponding need for new communication, navigation and surveillance technologies that allow military aircraft to share airspace with commercial aircraft.

These are the very technologies in which Harris excels. Harris' products include combat radios, fighter-jet cockpit communications and command-control systems for military planners.

Harris helps end-users contribute to product development by maintaining a transparent supply chain that fosters collaboration and integration. This "groupware" approach to its supply chain ensures that each of the vendors contributing to an avionics or communications system produces standardized modules that can be easily integrated. Hence the company's oft-repeated motto: "Right item, right supplier, the first time."

The US military covets the company's products and Uncle Sam is one of the most profitable and reliable clients a business can serve. The Department of Defense (DoD) budget for 2012 is roughly $525 billion, up 89% since 2001. And despite investor fears of draconian cutbacks, reports of military spending's demise are highly politicized and greatly exaggerated.
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