Is L3Harris Technologies (LHX) Still a Buy After a Strong 2025 Rally? Valuation Realism vs. Market Optimism in a Defense Sector Re-rating

The defense sector has experienced a dramatic re-rating in 2025, driven by geopolitical tensions, surging government spending, and the demand for advanced technologies. Against this backdrop, L3Harris Technologies (LHX) has seen its stock rally, raising critical questions about whether its valuation remains grounded in fundamentals or has been overtaken by market optimism. This analysis examines LHX's valuation metrics-Price-to-Earnings (P/E), Price-to-Book (P/B), and Enterprise Value-to-EBITDA (EV/EBITDA)-relative to sector averages to assess its investment appeal.

Market Optimism: A Sector in Overdrive

The defense sector's valuation multiples have expanded significantly in 2025. The sector's trailing P/E ratio reached 44.5x in December 2025, far exceeding its 3-year average of 32.1x, while the EV/EBITDA multiple averaged 17.24, reflecting heightened investor confidence. This re-rating is fueled by global conflicts, which have spurred a 9.7% quarterly increase in EBITDA multiples for defense contractors. Such dynamics suggest a market pricing in prolonged growth, even as macroeconomic risks loom.

LHX's Valuation: Realism Amidst Optimism

L3Harris Technologies, a key player in defense electronics and systems, trades at a trailing P/E of 32.78, below the sector's 35.4x average and its peer group's 34.3x average. This implies relative undervaluation compared to rivals, despite LHX's robust earnings growth of 43.6% year-over-year. Its forward P/E of 24.57 further indicates that the market anticipates continued earnings momentum, aligning with its strong operational performance.

On the P/B ratio, LHX's 2.92 is markedly lower than the defense sector's 6.83 average, suggesting a more conservative valuation relative to book value. This divergence could reflect either disciplined capital allocation by LHX or a market skepticism toward its asset-heavy business model compared to peers with higher P/B ratios, such as Kratos Defense's 6.64.

The EV/EBITDA metric tells a nuanced story. LHX's 17.56 multiple is slightly above the sector's 17.24 average, indicating a modest premium. However, this premium is justified by LHX's scale and profitability, as evidenced by its 8.1% net profit margin (compared to the industry's 5.7%). The company's ability to generate consistent cash flows in a capital-intensive industry likely supports its higher multiple.

Balancing Realism and Optimism

While LHX's valuation appears reasonable relative to sector averages, the broader market's enthusiasm for defense stocks introduces risks. The sector's EV/EBITDA multiples have surged to levels not seen since the post-pandemic recovery (median of 14.1 in October 2023), raising concerns about overvaluation. If geopolitical tensions ease or fiscal constraints curb defense spending, multiples could contract, pressuring even fundamentally sound stocks like LHX.

However, LHX's earnings growth and disciplined valuation metrics provide a buffer. Its forward P/E of 24.57 implies a discount to the sector's current 44.5x P/E, suggesting the market has not fully priced in its growth potential. Additionally, its P/B ratio of 2.92 is well below the sector's 6.83 average, offering a margin of safety if sector-wide multiples normalize.

Conclusion: A Buy with Caution

L3Harris Technologies remains attractively valued relative to its peers, with a P/E and P/B ratio that suggest realism in its pricing. Its EV/EBITDA multiple, while slightly elevated, is justified by operational strength and profitability. However, the defense sector's speculative re-rating introduces systemic risks. Investors should view LHX as a buy but with caution, balancing its relative undervaluation against the sector's frothy valuation environment. In a market where optimism often overshadows fundamentals, LHX's disciplined metrics offer a compelling case for long-term investors willing to navigate near-term volatility.