L3Harris Technologies (LHX): A Compelling Buy Amid Defense Sector Tailwinds and Strong Earnings Outperformance

In the ever-evolving landscape of defense and aerospace, L3Harris Technologies (LHX) has emerged as a standout performer, driven by robust earnings growth, strategic investments, and a surge in institutional confidence. As the company navigates a sector characterized by high valuations and long-term government contracts, its current valuation appears to offer a compelling entry point for investors seeking exposure to defense-sector tailwinds.

Earnings Momentum and Strategic Growth

L3Harris Technologies delivered a stellar Q3 2025 performance, reporting revenue of $5.7 billion-a 7% year-over-year increase and 10% organic growth, according to the L3Harris Q3 2025 release. This outperformance was underpinned by strong demand in its core markets, particularly in space and munitions, where the company has strategically allocated capital. The operating margin of 11.0% and adjusted segment operating margin of 15.9%-the release highlights operational efficiency-while the company's decision to raise 2025 guidance underscores its confidence in sustaining this momentum.

The defense sector, historically insulated from macroeconomic volatility due to its reliance on government contracts, is experiencing a unique confluence of factors: geopolitical tensions, modernization demands, and a backlog of $35 billion for L3Harris, according to that release. These dynamics position the company to capitalize on long-term secular trends, even as peers trade at inflated multiples.

Institutional Confidence and Ownership Trends

Institutional investors have taken notice. Bank of New York Mellon Corp increased its stake in L3Harris by 52.3% in Q2 2025, now holding 2.20% of the company's shares, valued at over $1 billion, according to a MarketBeat filing. Envestnet Asset Management Inc. added 8.9% to its position, while other major players like Price T Rowe Associates and Invesco also boosted holdings by 1.9% to 12.2%, the filing said. This surge in institutional ownership reflects a consensus that L3Harris is undervalued relative to its growth prospects and sector peers.

Valuation Metrics: A Mispricing Opportunity

L3Harris currently trades at a P/E ratio of 32.24, per a MarketBeat alert, a stark contrast to the defense sector's average P/E of 394.05 in Q2 2025, according to CSImarket data. Even more striking is Kratos Defense & Security Solutions' (KTOS) forward P/E of 902.2, according to a GuruFocus report, which underscores the sector's premium valuations. This divergence suggests that L3Harris is being unfairly discounted despite its superior earnings trajectory and operational discipline.

The company's FY 2025 Non-GAAP EPS guidance of $10.50–$10.70 implies a forward P/E of approximately 30–31, assuming a share price of $315–$322. Analyst projections of $11.12 average EPS, the MarketBeat alert noted, further reinforce the case for a PEG ratio below 1, a rare feat in the defense sector. For context, the sector's average P/E ratio is inflated by companies like Kratos, which rely on speculative growth and niche contracts, as the GuruFocus report discusses, whereas L3Harris's diversified portfolio and consistent margins offer a more stable foundation.

The Case for a Buy

The combination of earnings outperformance, institutional backing, and a valuation that diverges from sector norms creates a compelling investment opportunity. L3Harris's strategic focus on high-growth areas like space and munitions aligns with multiyear government spending plans, ensuring a durable revenue stream. Meanwhile, the company's operating margins and backlog provide a buffer against short-term volatility.

For investors, the current P/E of 32.24 appears disconnected from the company's fundamentals and sector peers. As institutional investors continue to load up on shares, the market may eventually correct this mispricing, rewarding early buyers with capital appreciation.