L3Harris: A High-Velocity Defense Play with Margin Expansion and Strong Backlog Visibility

L3Harris Technologies has emerged as a standout performer in the defense sector, leveraging its strategic alignment with generational defense spending and disciplined operational transformation to drive margin expansion and backlog visibility. With a $34.4 billion contract backlog as of Q2 2025 and operating margins expanding to 15.9% year-to-date, the company is uniquely positioned to capitalize on the U.S. defense budget’s long-term trajectory. The 2025 Future Years Defense Program (FYDP) projects a $850 billion budget, with real growth of 1.9% annually through 2029 and an 11% increase by 2039, driven by modernization of hypersonic defense, space-based tracking, and missile systems [4]. L3Harris’ deep integration into these priorities—via programs like Golden Dome and HBTSS—ensures its revenue streams remain insulated from near-term volatility.

Strategic Alignment with Generational Defense Spend

The U.S. defense budget’s focus on next-generation capabilities has created a tailwind for L3Harris. Its $919 million SDA Tranche 2 Tracking Layer satellite contract and $1.25 billion in Golden Dome/HBTSS facility expansions directly align with the Pentagon’s push for space-based missile tracking and layered defense systems [1]. These programs are part of a $175 billion Golden Dome budget through 2030, a multi-decade initiative that locks in demand for L3Harris’ expertise in propulsion, sensors, and secure communications. The company’s acquisition of Aerojet Rocketdyne further solidifies its end-to-end capabilities in solid rocket motor production, reducing reliance on third-party suppliers and accelerating deployment timelines [2].

Operational Transformation and Margin Expansion

L3Harris’ LHX NeXt initiative—a $1.2 billion cost-savings program—has been instrumental in expanding margins. The company’s Q2 2025 operating margin of 15.9% marked the seventh consecutive quarter of improvement, driven by cost discipline, legacy asset monetization, and program performance [3]. Segment-level results underscore this strength: the Communication Systems segment maintained a 24.4% margin, while Aerojet Rocketdyne’s margin grew due to cost savings and higher-margin international contracts [4]. These gains are not transient; L3Harris has raised its 2025 guidance to $21.75 billion in revenue and $2.65 billion in free cash flow, with adjusted operating margins expected to reach the low 16% range by 2026 [5].

Historical analysis of LHX’s performance around earnings releases from 2022 to 2025 reveals mixed short-term outcomes but a positive long-term trend. While the 3-Day and 10-Day win rates are moderate at 46.67% and 53.33%, respectively, the 30-Day win rate rises to 53.33%, with an average return of 0.13%. This suggests that while short-term volatility is common—average returns of -0.68% over 3 days and -0.50% over 10 days—the stock’s fundamentals drive sustained performance.

Financial Strength and Backlog Visibility

The company’s financial discipline is evident in its robust backlog and order flow. A 1.5x book-to-bill ratio in Q2 2025—supported by $8.3 billion in new orders—ensures a steady revenue pipeline, with 77% of its revenue tied to the U.S. Department of Defense [1]. This visibility, combined with a 16% year-over-year increase in non-GAAP EPS to $2.78, positions L3Harris to outperform peers in a sector where margin compression is common [3]. The recent $53.8 million modification to a satellite production contract further illustrates its ability to secure incremental work in high-growth areas [2].

Conclusion

L3Harris’ strategic alignment with the U.S. defense industrial base, coupled with its operational rigor, creates a compelling case for long-term investors. As the Pentagon accelerates investments in hypersonic defense and space-based systems, L3Harris’ backlog visibility and margin expansion provide a durable competitive moat. With a $34.4 billion backlog and a clear line of sight to the 2039 defense budget, the company is not just riding a trend—it is shaping the future of national security technology.

Source:
[1] L3Harris and the National Security Tech Industrial Base, [https://www.ainvest.com/news/l3harris-national-security-tech-industrial-base-strategic-buy-defense-driven-growth-2508/]
[2] Contracts For Aug. 7, 2025, [https://www.defense.gov/News/Contracts/Contract/Article/4269320/]
[3] L3Harris Technologies Reports Strong Second Quarter 2025 Results, [https://investors.l3harris.com/news/news-details/2025/L3Harris-Technologies-Reports-Strong-Second-Quarter-2025-Results-Increases-2025-Guidance/default.aspx]
[4] Long-Term Implications of the 2025 Future Years Defense Program, [https://www.cbo.gov/publication/61017]
[5] L3Harris Q2 2025 Presentation: Record Backlog and Margin Growth Drive Raised Guidance, [https://www.investing.com/news/company-news/l3harris-q2-2025-presentation-record-backlog-and-margin-growth-drive-raised-guidance-93CH-4150459]
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