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

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

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On the Bargain Counter

Despite these long-term advantages, the company's stock now trades at a bargain because of a disappointing first-quarter performance. On Oct. 29, Harris reported a net loss of $85.8 million in its first quarter for fiscal 2013, compared to net income of $121.6 million during the same period last year. The company also reported a 5.9 percent drop in revenue to $1.26 billion compared to $1.34 billion in 2011.

However, most investors are overlooking the fact that these numbers represent a one-time setback. Management blamed the earnings misfire on large impairment charges in the first quarter from discontinued operations in broadcast communications and cloud-computing data services, as the company seeks to focus on its core aerospace operations-a wise move that will payoff over the long term.

Orders in Harris' pipeline point to continued strong growth in the second quarter, but with a trailing price-to-earnings (P/E) ratio of about 8, the company remains attractively valued compared to the peers. Defense stocks now sport a trailing P/E of 10, compared to the trailing market P/E of 11.

In a harbinger of future success, Harris on Oct. 30 received a new $50.5 million order from the US Army for next-generation satellite communications terminals. Harris is the prime contractor for the five-year contract, which has a ceiling of $600 million.

Also in late October, Harris was awarded a DoD contract worth $397 million to continue providing it with its Falcon III handheld tactical radio systems.

Harris generates strong free cash flow and on Oct. 26 increased its dividend by 12 percent, the second increase this calendar year. The company declared a quarterly dividend of $0.37 per share, or $1.48 annualized, for an annual yield on the dividend of 3.1 percent.

The company also plows a considerable amount of its resources into research and development, maintaining a staff of 7,000 engineers and scientists, out of a total workforce of 15,000.

Harris' investment in technology innovation will continue to pay off for the company and its investors, this year and beyond.

This article by John Persinos originally appeared on Investing Daily.

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No positions in stocks mentioned.
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