(By Kevin Donovan) We have to confess, any company that produces "ruggedized" products impresses us. And companies that rely on government spending for their bread and butter will have to be rugged as well, like Harris Corp. (HRS), the radio maker for the armed forces and public safety officials.
That's because Melbourne, FL-based Harris does about 60% of its business with the U.S. government, which faces the so-called "fiscal cliff" in 2013, when automatic cuts in government spending are timed to kick in.
In a recent interview with CNBC, Harris CEO William Brown was not coy about the uncertainty facing his company and other defense contractors. "It's very, very difficult to plan in an environment where our customer, the Pentagon, aren't planning themselves," he said.
But Harris' saving grace could be its substantial pipeline of orders. That should be enough to buoy the company and keep its dividend, currently offering a yield north of 3%, intact. And if, as we believe, some kind of compromise is reached in Washington to avert draconian cuts in defense spending, share price appreciation is foreseeable some six months from now.
Meanwhile, Harris is logging new business. Its most recent win is a contract worth $11.8 million to supply Virginia's Region 2000 government with advanced, standards-based digital technology improve and unify mission-critical communications for more than 3,000 first responders and public works users. Region 2000 includes 184,460 residents in Bedford and Amherst Counties, including the city of Lynchburg.
The system will make communications interoperable between cities and counties, the kind of communications that the 9/11 terrorist attacks in New York exposed the need for.
"To respond together in an emergency situation, Virginia's Region 2000 members know they must communicate as one across their large and diverse area," said Steve Marschilok, president, Harris Public Safety and Professional Communications. "The Harris P25 system creates one integrated solution from what had been three different communication systems, giving them a powerful and unified capability."
Last month, Harris landed an $8 million contract to supply its P25 system to Saudi Arabia's Ministry of Health and it signed a $12 million renewal deal with the Brazilian subsidiary of Diamond Offshore to provide communications for semisubmersible rigs in the region.
Harris is best known for its tactical radios used by soldiers on the battlefield. The military uses the encrypted handsets with a "ruggedized" tablet to communicate with voice, video and data up and down the chain of command.
The stock has fluctuated between $31.94 and $45.52 in the past year. At the current price of $41.57, the stock trades at about 8 times next year's earnings per share estimate of $5.16.
In the latest quarter, income from continuing operations was $1.39 per diluted share, compared with $1.18 per diluted share in the prior year. Free cash flow of about $151.4 million easily covered dividends of $37.4 million.
Harris has expressed confidence in its dividend and CEO Brown said the company aims to increase its payout. We think the dividend is robust and secure enough to keep investors satisfied until the defense spending picture clears up. We like what we see as a "ruggedized" investment that should weather uncertainty we believe Washington will be forced to resolve before it reaches the fiscal cliff. In the meantime, you get paid for waiting.