Investor Essentials Daily

This defense player is growing with the new arms race

April 18, 2024

Global political instability and conflicts are causing countries worldwide to increase their defense spending.

The ongoing war in Ukraine and tensions between Israel and Hamas are contributing to heightened security concerns.

In response, countries are pledging to enhance military capabilities and cooperation.

This rise in defense budgets is driving growth in the aerospace and defense industry, benefiting companies like L3Harris Technologies (LHX).

L3Harris, formed from a merger in 2019, specializes in various defense and commercial technologies and is well-positioned to capitalize on this trend with its broad portfolio and strong financial performance.

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As global political instability and conflicts continue to escalate, countries around the world are responding by ramping up their defense spending.

The ongoing war in Ukraine, which shows no signs of ending anytime soon, has heightened security concerns across Europe. Meanwhile, conflicts like the recent hostilities between Israel and Hamas only add to the volatile geopolitical environment.

In response to these mounting risks, the United States and its allies have pledged to strengthen their military capabilities.

The European Union in particular has taken a more assertive stance, with leaders vowing to boost defense cooperation and investments. Countries like Germany have announced historic increases to their defense budgets in light of the new security realities.

This shift toward greater military commitments is directly fueling growth in the aerospace and defense industry. Companies that provide critical technologies to governments and militaries around the world are poised to benefit tremendously from the rising tide of defense budgets.

While giants like Lockheed Martin (LMT) and Northrop Grumman (NOC) will undoubtedly capture large portions of new spending, opportunities also exist further down the supply chain.

One such player well-positioned to capitalize on surging defense spending is L3Harris Technologies (LHX).

Founded in 2019 through the merger of L3 Technologies and Harris Corporation, L3Harris is a global aerospace and defense technology powerhouse with over $19 billion in annual revenues.

L3Harris has a significant portfolio of technologies supporting both military and commercial customers.

On the defense side, it is one of the top providers of intelligence, surveillance, and reconnaissance systems, night vision products, tactical radio systems, and space components.

Some of its key military platforms include the F-35 Joint Strike Fighter, the C-130 Hercules, and various missile defense programs.

Commercially, L3Harris technologies enable critical infrastructure like air traffic management, maritime domain awareness, emergency response systems, and environmental monitoring solutions.

Its products play a role in s aviation, homeland security, energy, and transportation.

L3Harris invests around $500 million annually in R&D to develop the next generation of mission systems, from directed energy to hypersonic technologies.

Financially, L3Harris has consistently delivered solid revenue growth, maintaining a backlog of over $33 billion in orders. Its diversified revenue mix between defense, civilian government, and commercial end markets provides resilience.

Margins have also improved since the L3-Harris merger through synergies and operational efficiencies.

The company has a strong existing position on many major defense programs thanks to its legacy of innovation and partnership with government agencies.

A recent contract win shows how defense spending increases are already translating to more contracts for L3Harris.

In October 2023, the company secured a $155 million Army deal to provide night vision equipment, demonstrating ongoing demand. While the value of individual deals may be relatively small for L3Harris’ sizable operations, growing budgets mean more deals of all sizes in the future.

Going forward, L3Harris aims to expand further into adjacencies like space, cyber, and autonomous systems.

The supportive defense spending environment and the company’s technological leadership position it well for continued growth and contract wins in the coming years.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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