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L3Harris Technologies: A Strategic Buy Amid Margin Expansion and Defense Tailwinds

Theodore QuinnSunday, May 11, 2025 5:08 am ET

16min read

L3Harris Technologies (NYSE: LHX), a leader in aerospace, defense, and technology systems, has emerged from its first-quarter 2025 earnings with a compelling narrative: margin-driven resilience in a challenging environment. Despite headwinds from strategic divestitures and program delays, the company’s focus on cost discipline, high-margin segments, and shareholder returns positions it as an attractive buy for investors prioritizing long-term growth and stability.

Key Takeaways
- Revenue declined 2% to $5.1B due to divestitures, but operating margins expanded 290 basis points to 10.2%, driven by LHX NeXt cost savings.
- EPS rose 38% to $2.04, while free cash flow guidance remains robust at $2.4–$2.5B.
- Backlog of $34B and a 1.14x book-to-bill ratio signal strong demand for defense and space systems.

Financial Fortitude Amid Strategic Shifts

L3Harris’s Q1 results underscore its ability to navigate portfolio changes while maintaining profitability. The company’s decision to divest its Commercial Aviation Solutions (CAS) business and Aerojet Ordnance Tennessee (AOT) division reduced revenue by $525M annually but prioritized higher-margin segments like Communication Systems (4% growth to $1.35B) and Aerojet Rocketdyne (9% organic growth to $629M).

Margin Expansion as a Growth Engine
The GAAP operating margin surged to 10.2% (up 290 bps from 7.3% in Q1 2024), while adjusted segment margins rose 50 bps to 15.6%. These improvements stem from the LHX NeXt initiative, which targets $1.2B in cumulative cost savings by 2025—$800M ahead of schedule. CEO Christopher Kubasik emphasized that these savings are “embedded in the business,” ensuring sustained margin expansion.

Segment Performance: Strengths and Challenges

Communication Systems: International sales of resilient communication equipment (e.g., NATO contracts) drove 4% organic growth, with margins hitting 25.5%—the highest in years.
Integrated Mission Systems: Revenue dipped 2% due to delayed aircraft programs, but 12.8% margins reflected cost efficiencies and higher-margin sensors.
Space & Airborne Systems: Margin contraction (10.9%) to SAS’s classified program delays, but LHX NeXt savings mitigated losses.
Aerojet Rocketdyne: Missile and munitions demand propelled 8% revenue growth, though margin pressures (12.1%) from reduced contract adjustments remain a near-term concern.

2025 Guidance: Prudent Adjustments, Steady Growth

Despite lowering its revenue guidance to $21.4–$21.7B (down $500M from prior targets), L3Harris reaffirmed its $2.4–$2.5B free cash flow goal and raised its dividend for the 24th consecutive year. Non-GAAP EPS guidance of $10.30–$10.50 reflects confidence in cost savings offsetting divestiture impacts.

Valuation and Long-Term Outlook

L3Harris trades at 16x 2025E EPS, a discount to its 5-year average of 19x, despite its fortress balance sheet ($615M cash, $19.1B equity). The company’s $34B backlog (1.14x book-to-bill) and 2026 targets—$2.7–$2.8B in EPS and $3B in free cash flow—suggest upside potential.

Risks to Consider

Geopolitical Uncertainty: U.S. defense spending and supply chain stability could fluctuate.
Program Execution: SAS’s classified programs and AR’s space propulsion delays pose near-term margin risks.

Conclusion: A Buy on Margin and Multiples

L3Harris’s Q1 results highlight its ability to convert strategic shifts into margin gains, even amid revenue headwinds. With a 2026 EPS target of $2.8B (vs. $21.3B in 2024 revenue), the stock’s current valuation offers a compelling entry point. The company’s $2.5B free cash flow, 24-year dividend growth streak, and alignment with U.S. defense priorities (hypersonics, cyber, and space systems) further support its long-term appeal.

Investors seeking a defensive play with growth catalysts in a high-demand sector should consider L3Harris as a buy, particularly if shares dip below $200 (a 10% discount to recent lows). The combination of margin resilience, robust cash flows, and a disciplined capital strategy makes LHX a standout name in aerospace and defense.

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