Category: Technology Stocks

Tech stocks refer to any stock involved in the technology sector, from semiconductor producers to software providers. Tech stocks are often a leading indicator for the economy and the stock market. Technology stocks generally follow the pattern of more innovation in the market & new development of product.

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Sectors Technology Stocks

Aristocrat Leisure to gain strong boost through Playtech acquisition

Investment Thesis:

  • Fasting growing Digital business, with strong execution by management
  • Expectations of new product releases will gain significant traction with customers 
  • Increasing skew towards recurring revenue
  • Global gaming exposure
  • Growing market share in underpenetrated markets
  • Leveraged to a falling AUD
  • Strong balance sheet with ample liquidity provides management with significant flexibility to take advantage of value accretive acquisitions or pursue organic growth opportunities 

Key Risks:

  • Any further downside to the Japanese market
  • Low replacement/uptake in the US market
  • Competition risk
  • Loss in market share
  • Lack of product development
  • Adverse currency movements
  • Adverse outcome from any potential court case

Key highlights:

  • The proposed acquisition of Playtech is strategically and financially compelling. It will accelerate Aristocrat strategy and provide material scale in the already large and growing $70bn online RMG segment.
  • ALL’s share price has performed strongly and is up 34.9% over a one-year period
  • Enhanced market leading positions in gaming operations, measured by the number of machines and fee per day
  • Sustainable growth before share across key gaming outright sales markets globally
  • Further growth in Pixel United bookings with UA spend and expected to be within the recent range of 26% and 29% of overall Pixel United revenues, pending priming and success of new game launches during the year
  • Continued D%D investment to drive sustained long-term growth with investment likely to be modestly above the historical range of 11% to 12% of revenue
  • operating revenue of $4,736.1m was up +14.4% on a reported basis, or +24.8% in CC, whilst EBITDA of $1,542.9m was up +43% on a reported basis and +58% higher on a CC basis
  • ALL’s normalised profit after tax and before amortisation of acquired intangibles (NPATA) of $864.7m, was up +81% in reported terms, and +102% in constant currency (CC) relative to the prior corresponding period (pcp), driven by strong product and portfolio performance, and profitable growth across both Aristocrat Gaming and the Pixel United businesses

Company Description: 

Aristocrat Leisure Ltd (ASX: ALL) manufactures and sells gaming machines in Australia and globally, to casinos, clubs and hotels. In addition, ALL provides complementary products and services such as gaming systems and software, table gaming equipment and other related products.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Synaptics well-positioned to capitalize on the secular trends toward smart devices and experience-centric

Business Strategy and Outlook:

Synaptics is an emerging provider of audio, video, automotive, docking, and wireless products for the consumer Internet of Things market, and to a decreasing extent, a developer of touch, display, and fingerprint solutions for the mobile device and PC markets. As the mobile and PC markets mature and growth opportunities diminish, Synaptics has focused investment efforts and resources on consumer Internet of Things, particularly on automotive, smart homes, and low power edge artificial intelligence, which we view favourably.

Within mobile, legacy solutions include discrete touch circuits that enable touch-based device interaction and user authentication, and display drivers to control LCD, and increasingly OLED, displays. As the mobile industry matures, component suppliers face heightening competitive pressures from industry consolidation, supplier price wars, and fast design refresh cycles. Over recent years Synaptics has worked to abate its mobile business’ decline by building combined products, like touch and display driver integrated chips, or TDDI chips, which, while industry-unique, failed to gain traction in the saturated competitive landscape. Accordingly, the transition to an Internet of Things-focused portfolio is viewed as a smart, necessary move.

Financial Strength:

As Synaptics made the strategic decision to divest its low margin LCD TDDI business in 2020 and transition investment focuses to higher-margin Internet of Things products, the company experienced a return to growth in its top line in fiscal 2021. 

Synaptics is in decent financial condition. At the end of fiscal 2021, the firm had $836.3 million in cash and equivalents, compared with $881.5 million of debt on its balance sheet. While the majority of the debt matures in the next year, analysts believe the cash cushion is strong and expect little material impact to future liquidity. Overall, the company generates adequate cash flow to meet its interest expense obligations. The company is anticipated to maintain a cash position that allows it to withstand the cyclical troughs to which semiconductor firms are prone while also maintaining a healthy research and development budget to remain competitive in the cutthroat consumer electronics market. Capital allocation priorities include organic growth investments, strategic acquisitions, debt level management, and opportunistic share repurchases.

Bulls Say:

  • An emerging leader in the Internet of Things space with its broad portfolio of audio, video, and wireless solutions winning designs in multiple Internet of Things end markets. 
  • The acquired Conexant, Marvell’s multimedia solutions business, DisplayLink, and Broadcom’s Internet of Things business have significantly diversified Synaptics’ product portfolio and opened it up to new high growth areas.
  • As the automotive industry experiences secular trends toward the digitalization of cars, Synaptics’ rapidly growing TDDI product for infotainment systems is likely to continue fueling success.

Company Profile:

Synaptics is a global producer of semiconductor solutions for the mobile, PC, and Internet of Things markets. The company develops human interface solutions that enable touch, display, fingerprint, video, audio, voice, AI, and connectivity functions for smartphones, PCs, Internet of Things products, and other electronic devices.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Mastercard Has Multiple Characteristics That Should Draw Investors’ Attention

Business Strategy and Outlook

Mastercard has multiple characteristics that should draw investors’ attention. First, despite the evolution in the payment space, and view Mastercard’s position in the current global electronic payment infrastructure as essentially unassailable. Second, Mastercard benefits from the ongoing shift toward electronic payments, which provides plenty of opportunities to utilize its wide moat to create value over the long term. 

Mastercard is not without issues in the near term. Cross-border transactions, which are particularly lucrative for the networks, came under heavy pressure due to the fallout from the pandemic and a reduction in global travel. From a longer-term point of view, it is likely that smaller and more regional networks are building out additional capacity for cross-border transactions, which could eat into growth a bit in the coming years, but we haven’t seen a material effect yet. While this situation bears watching, Visa and Mastercard’s global networks remain unparalleled, and this will remain the case for many years to come.

 A downturn in the economy would slow overall growth, as Mastercard’s revenue is sensitive to the volume and dollar amount of consumer transactions. The company has already seen growth decline significantly due to the pandemic.

Morningstar analysts  increased the fair value estimate to $352 per share from $337 due to time value since the last update and some adjustments to assumptions. The fair value estimate equates to 33.6 times projected 2022 earnings, adjusted for one-time expenses.

Financial Strength 

Mastercard’s balance sheet is in solid shape. The company added a small amount of debt to its balance sheet in 2014 and in the years since has steadily increased debt. Still, debt/EBITDA at the end of 2020 was a very reasonable 1.5 times, and Mastercard’s leverage is still a bit below Visa’s. The company has shown a relatively limited appetite for M&A, and the business model requires very little balance sheet investment, so management has considerable flexibility. On the other hand, an overly conservative balance sheet structure could impede long-term shareholder returns.

Bulls Say 

  • Mastercard has been outperforming Visa in terms of growth. Its smaller size and some leveling in market share between the two could maintain this trend. 
  • There is still plenty of runaway for growth in electronic payments. Electronic payments only surpassed cash payments on a global basis a couple of years ago. 
  • Management is appropriately focused on long-term growth opportunities and not near-term margins.

Company Profile

Mastercard is the second-largest payment processor in the world, having processed $4.8 trillion in purchase transactions during 2020. Mastercard operates in over 200 countries and processes transactions in over 150 currencies.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

Clover Shows How Fiserv Can Adapt

20025825 - closeup image of businessman drawing 3d graphics

Business Strategy and Outlook

Fiserv’s merger with First Data in 2019 kicked off a string of three similar deals that took place in short order. But it is believed that Fiserv’s move was not attractive relative to the other two, and the company materially didn’t strengthen its competitive position. However, there is a valid strategic rationale for these deals, and the introduction of First Data’s acquiring business should boost overall long-term growth, given the secular long-term tailwind the business enjoys.

First Data has been a laggard compared with peers over the past decade, as it was overwhelmed by an excessive debt load due to a leveraged buyout just before the financial crisis and the defection of a major bank partner. However, in recent years the company worked its leverage down to a more manageable level, and growth improved, suggesting its issues are not structural. With financial health no longer a concern, the stage could be set for First Data to narrow the growth gap with peers. While First Data remains relatively reliant on its banking partners, initiatives such as Clover suggest it is capable of adjusting to a changing industry. Clover, the company’s small-business solution that has similarities to Square’s offering, has seen strong growth, with volume running at an annualized rate of almost $200 billion. 

The COVID-19 pandemic did illustrate one negative of this merger: The acquiring business is significantly more macro-sensitive than Fiserv’s legacy operations. But payment volume has steadily improved and returned to year-over-year growth. Unless the pandemic takes a sharp negative turn, the long-term secular tailwind appears to be reasserting itself and the worst seem to be past the industry. Over the long term, the acquiring operations should be the company’s strongest engine for growth.

Financial Strength 

There are no major concerns about Fiserv’s financial condition. While the First Data merger was stock-based, debt/EBITDA was 4.1 at the end of 2020, as Fiserv absorbed First Data’s heavier debt load. This level is not excessive, considering the stability of the business. Management appears to be focused on debt reduction in the near term. The company enjoys strong and relatively stable free cash flow and doesn’t pay a dividend. This creates significant flexibility and should allow the company to pull leverage down to a level in line with the historical average fairly quickly. 

Bulls Say 

  • The bank technology business is very stable, characterized by high amounts of recurring revenue and long-term contracts. 
  • The ongoing shift toward electronic payments has created and will continue to create room for acquirers to see strong growth without stealing share from each other. 
  • First Data’s growth had accelerated before the merger as it worked past its financial issues, and the business now has access to greater resources under Fiserv’s roof.

Company Profile

Fiserv is a leading provider of core processing and complementary services, such as electronic funds transfer, payment processing, and loan processing, for U.S. banks and credit unions, with a focus on small and midsize banks. Through the merger with First Data in 2019, Fiserv now provides payment processing services for merchants. About 10% of the company’s revenue is generated internationally.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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NEXTDC reports strong results as of ongoing cloud adoption

Investment Thesis

  • Australia is still in the early stages of cloud adoption. The NBN’s implementation will drive demand from cloud providers for NXT’s asset follows more efficient and cheaper broadband. 
  • Extremely high-quality collection of sites.
  • Tier 4 gold centers focus on the premium end where pricing is more stable.
  • NXT has balance sheet capacity to handle more debt and self fund expansion through operating cash flow from the base building. 
  • Capital intensive nature of the sector provides a high barrier to entry.
  • Government adoption of cloud and the subsequent need to outsource present an opportunity.
  • Sticky customers are unlikely to churn which creates a strong customer ecosystem.
  • The Company’s national footprint enables it to scale more effectively than competitors.
  • Margin expansions demonstrate strong operating leverage.
  • Additional capacity has been announced.
  • Given the global demand for data, mergers and acquisitions are on the rise.

Key Risks

  • There is no product diversification (NXT only operates data centres).
  • NXT and competitors have significantly increased their supply of data centres.
  • Delays in the construction or ramp-up of data centres have an impact on the earnings growth profile.
  • Pressures from competitors (price discounting by NXT or competitors).
  • Higher power densities in Australia as a result of increased average rack power utilization.
  • Inadequate customer demand to generate a satisfactory return on investment.
  • NXT’s ability to expand and pursue growth opportunities may be hampered if sufficient capital is not obtained on favourable terms.
  • The risk of leasing (NXT does not own the land or building where its data centres are situated).

FY21 results highlights 

  • Data center service revenue was up +23% to $246.1million and at the bottom end of upgraded guidance of $246m to $251m.
  • Underlying EBITDA increased by +29 percent to $134.5 million, exceeding the company’s revised guidance of $130 million to $133 million.
  • Operating cash flow increased by 148% to $133.2 million.
  • Capex was down -18% to $301 million, falling short of the $380-400 million range.
  • NXT had $1.7 billion in liquidity (cash and undrawn debt facilities) at the end of the fiscal year, and its balance sheet strength is supported by $2.6 billion in total assets, indicating that it is well capitalised for growth.
  • Contract utilisation increased by 8% to 75.5MW. (7) NXT’s customer base increased by 183 (or 13%) to 1,547.
  • Interconnections grew 1,667 (or +13%) to 14,718, and now equates to ~7.7% of recurring revenue.

Company Profile 

NEXTDC Limited (NXT) is a Data-Center-as-a-Service (DCaaS) provider offering a range of services to corporate, government and IT services companies. NXT has a total of five data centers located in major commerce hubs in Australia, with three more due to be completed within the next 2 years. These facilities are network-neutral, meaning they operate independently of telecommunication and IT service providers. Currently NXT has a total of 34.7 MW built for data and serving housing, with a target to reach 104.1MW by the end of 1H18. 

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Technology Stocks

BorgWarner Q3 Results Take Chip Crunch Hit

20025825 - closeup image of businessman drawing 3d graphics

and the popularity of sport utility and crossover vehicles around the world. The company benefits from its ability to continuously innovate, a global manufacturing footprint, highly integrated long-term customer ties, high customer switching costs, and moderate pricing power from new technologies. The acquisition of Delphi Technologies on Oct. 1, 2020, supports our thesis.

BorgWarner is also well positioned for growth in hybrids and battery electric vehicles. The Delphi acquisition adds electric and electronic controls to BorgWarner’s electric motors and driveline technologies. Regardless of the powertrain automakers chose, BorgWarner’s revenue growth potential remains unchanged. BorgWarner’s drivetrain business includes wet dual-clutch and torque transfer technologies. Dual-clutch transmissions, which contain eight or more gears, compared with older technology automatic transmissions equipped with four gears, can generate 5%-15% in fuel savings.

Financial Strength:

BorgWarner maintains a solid balance sheet and liquidity that, relative to many other parts suppliers, makes for strong financial health. Despite being acquisitive, the company has pursued a conservative capital strategy as total debt/total capital has averaged less than 15% over the past 10 years. Total adjusted debt/EBITDAR, which takes into consideration operating leases and rent expense, averaged less than 1 times over the same period. However, the company could have taken more advantage of the benefits of financial leverage without incurring the pitfalls of excessive debt. BorgWarner has adequate liquidity and can generate sufficient free cash flow to weather cyclical turns and to meet its financial obligations. The company refinanced a $251 million senior note that was due in September 2020.

Bulls Say:

  • Global clean air legislation enables BorgWarner’s topline growth to exceed worldwide growth in demand for light vehicles. 
  • The popularity of sport utility and crossover vehicles around the globe supports growth in BorgWarner’s torque transfer technologies. 
  • Volkswagen, Ford, and Hyundai are BorgWarner’s three largest customers and, on average, make up about one third of revenue.

Company Profile:

BorgWarner is a Tier I auto-parts supplier with four operating segments. The air management group makes turbochargers, e-boosters, e-turbos, timing systems, emissions systems, thermal systems, gasoline ignition technology, powertrain sensors, cabin heaters, battery heaters, and battery charging. The e-propulsion and drivetrain group produce e-motors, power electronics, control modules, software, automatic transmission components, and torque management products. The two remaining operating segments are the eponymous fuel injector and aftermarket groups. The company’s largest customers are Ford and Volkswagen at 13% and 11% of 2020 revenue, respectively. Geographically, Europe accounted for 35% of 2020 revenue, while Asia was 34% and North America was 30%.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Akamai’s Security Business Is on Fire as CDN Business Stagnates

The key to Akamai’s recent success has been the cybersecurity solutions it now offers. As the rest of its business struggles to produce revenue growth, security solutions have been growing about 30% annually and exceeded $1 billion in sales in 2020, making up one third of Akamai’s total sales. We think management is focusing on the right things and developing great products, but we fear the firm is susceptible to competitors’ CDNs.

The loss of so much business from the big Internet customers forced Akamai to look elsewhere for growth and rely less on the media business, which went from providing 58% of total revenue in 2014 to about 47% the past four years. Akamai now has a more robust web business, where it serves customers including retailers, financial services firms, travel-related companies, government agencies and others that benefit from having high-quality, interactive websites with significant traffic. Those firms also are particularly vulnerable to various hacking and security threats, which left an opportunity for Akamai to offer security products, and it is believed it will be the primary source of future growth.

Akamai’s Security Business Is on Fire as CDN Business Stagnates

Security continues growing at a rapid pace and has shown little sign of slowing down, even as it now makes up 40% of total revenue. The content delivery network, or CDN, business, which Akamai rebranded earlier this year as its Edge Technology Group, struggles to grow and is one where little opportunity for a competitive advantage exist.The most impressive aspect of Akamai to us is its ability to acquire small cybersecurity firms and integrate them into its own business.

Financial Strength 

Akamai is in excellent financial shape. At the end of 2020, it had $350 million in cash, about $750 million in marketable securities, and $1.9 billion in debt. The company typically trades with a gross debt/EBITDA ratio around 1.5. Akamai frequently makes small acquisitions, so its cash balance can frequently fluctuate. Akamai does not pay a dividend and does not intend to. It does return some cash back to shareholders via share repurchases, but the buybacks mostly just offset share dilution. 

Bulls Say 

  • Akamai is a major player in the exploding cybersecurity industry, so rapid growth there will more than offset a stagnant core CDN business. 
  • A major shift in viewing habits to Internet-based TV and video directly increases the need for content delivery networks, of which Akamai’s is second to none. 
  • The exodus of Akamai’s six Internet platform companies has stabilized, and they now represent well under 10% of sales, so they will no longer be a meaningful drag on growth.

Company Profile

Akamai operates a content delivery network, or CDN, which entails locating servers at the edges of networks so its customers, which store content on Akamai servers, can reach their own customers faster, more securely, and with better quality. Akamai has over 325,000 servers distributed over 4,000 points of presence in more than 1,000 cities worldwide. Its customers generally include media companies, which stream video content or make video games available for download, and other enterprises that run interactive or high-traffic websites, such as e-commerce firms and financial institutions. Akamai also has a significant security business, which is integrated with its core web and media businesses to protect its customers from cyber threats

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Lyft’s Network Effect Strengthened the Platform’s Supply and Demand in Q3; Increasing FVE to $66

that it is  valued at over $550 billion (based on gross revenue) by 2024, from estimated of $224 billion in 2019. Lyft warrants a narrow economic moat and a stable moat trend rating, thanks to the network effect around its ride-sharing platform and intangible assets associated with riders, rides, and mapping data, which can drive Lyft to profitability and excess returns on invested capital.

From a strategic standpoint, Lyft is well on its way to becoming a one-stop shop for on-demand transportation. It has tapped into the bike and scooter-sharing markets, which will be worth over $12 billion by 2029, growing 7% annually. Lyft also appears to be aggressively pursuing the autonomous vehicle route as it understands that self-driving cars may help the firm to expand its margins; without drivers, it could recognize a bigger chunk of the fare as net revenue. In contrast to Uber, Lyft is not focused on food transportation or logistics.

Financial strength

Increasing Fair Value Estimate for Lyft by 5% to $66, which represents a 46% upside from the stock’s 2nd  November closing price. Third-quarter revenue came in at $864 million, up 73% from last year, driven by more riders (51% growth from last year) and more drivers (45%). In addition, 47% more new riders were activated on Lyft than last year. Net revenue stood at 90% of 2019 third-quarter levels (up from 88% in the second quarter and from 52% last year), while riders were at 85% (up from 79% last quarter and from 72% in 2020). Net revenue per rider grew 14% year over year to $45.63, driven by increase in the number of rides requested per rider, which more than offset decline in prices.

Strong revenue growth created operating leverage and lessened operating loss to $177 million, from second quarter’s $240 million and last year’s $453 million in losses. Management expects fourth-quarter net revenue between $930 million and $940 million, which implies $3.17 billion- $3.18 billion full-year net revenue. The firm expects fourth-quarter contribution margin to come in at 59%. Lyft also guided for adjusted EBITDA between $70 million and $75 million in the fourth quarter, equivalent to a full-year adjusted EBITDA of around $90 million. 

 At the end of 2020, Lyft had $1.6 billion in net cash on its balance sheet. It burned $1.4 billion in cash from operations in 2020, significantly more than the $106 million in 2019, mainly due to the impact of the COVID-19 pandemic. By 2030, it is estimate that Lyft’s cash from operations to approach over $4 billion, outpacing top-line growth due to operating leverage. Excluding a one-time $18 million benefit, Lyft’s third-quarter adjusted EBITDA was $47 million (6% margin).

Bulls Say’s

  • Lyft’s position in the autonomous vehicle race could equalize gross and net revenue, if it no longer needs to pay drivers. 
  • Lyft will profit from its do-good brand in comparison with competitor Uber. 
  • The company’s aggregation of multimodal offerings will drive in-app stickiness, making Lyft a one-stop shop for all transport needs.

Company Profile 

Lyft is the second-largest ride-sharing service provider in the U.S., connecting riders and drivers over the Lyft app. Lyft recently entered the Canadian market in an effort to expand its market outside the U.S. Incorporated in 2013, Lyft offers a variety of rides via private vehicles, including traditional private rides, shared rides, and luxury ones. Besides ride-share, Lyft also has entered the bike- and scooter-share market to bring multimodal transportation options to users.

(Source: Morningstar)

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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Arista Capitalizing on Booming Demand for Cloud Data Centers and Adjacencies

Arista works closely with its core customers to optimize their networking ecosystems, which we believe can strengthen its customer switching costs. To expand its customer base beyond the data centers of hyperscale cloud providers, enterprises, service providers, and financial institutions, Arista announced its intention to expand into the campus market. The adjacent move is due to requests from existing customers desiring one software platform across networking locations, and Arista has bolstered its clout with wireless capabilities. Even with current customer concentration risk, Arista is growing alongside key customers and that new ventures have expanded from core competencies.

Financial Strength 

Arista is considered to be in a financially healthy position; its zero debt balance and $2.9 billion in cash, cash equivalents, and marketable securities as of the end of 2020 provide flexibility for the future. With no stated plans to return capital to shareholders, the company’s investment plan is fixated on developing products and expanding sales. It is believed that the company’s financial health will remain stable and cash could be deployed for growth via bolt-on products or technologies.

Bulls Say

  • Demand for EOS continuity across networks should proliferate Arista’s installation base. Installation base growth causes new customers to consider Arista during upgrades. 
  • Arista has been a first mover on its path to rapid profitable growth. Upcoming industry disruptions that Arista may lead include 400 Gb Ethernet switching and campus market splines. 
  • Instead of relying on partnerships to plug portfolio gaps, Arista might be able to make accretive acquisitions in adjacent markets that could catalyze growth in areas such as analytics, access points, and security.

Company Profile

Arista Networks is a software and hardware provider for the networking solutions sector. Operating as one business unit, software, switching, and router products are targeted for high-performance networking applications, while service revenue comes from technical support. Customer markets include data centers, enterprises, service providers, and campuses. The company is headquartered in Santa Clara, California, and generates most of its revenue in the Americas. It also sells into Europe, the Middle East, Africa, and Asia-Pacific.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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L3Harris Continues to Delivers on Merger-related Synergies

came about from the merger of equals between L-3 Technologies, a sensor-maker that operated a decentralized business focused on inorganic growth, and the Harris Corporation, a sensor and radio manufacturer that ran a more unified business. Underpinning the merger’s thesis was an assumption that additional scale would primarily generate cost synergies but that eventually, the firms would produce meaningful revenue synergies.

Cost synergies to a large extent drove the 30-year wave of consolidation across the defense industry, which has largely generated shareholder value. Arguably, L-3 was an ideal partner for a merger of equals because L-3 operated as a holding company and there are quite a few potential efficiencies from consolidating the firm into a more integrated firm. The three biggest firm-specific growth opportunities for L3Harris Technologies are the tactical radios replacement cycle, national security satellite asset decentralization, and electronic warfare capabilities.

Supply-Chain Issues Constrained L3Harris Q3 Sales, But booking remains same 

L3Harris reported a strong third quarter as sales were limited by supply chain issues. That noted, the shorter-cycle prime is showing its portfolio is well aligned in the decelerating funding environment, as the organic backlog of about $21 billion is up 9% from last year and 4% year to date. Many peer defense contractors have had declining backlogs in 2021. Revenue of $4.2 billion missed FactSet consensus by 6.6% but non-GAAP EPS of $3.21 beat FactSet consensus by 0.8%. Organic revenue declined 1.2% as a 5.2% organic revenue decline in communications systems due to supply chain difficulties and a 2.6% revenue decline in integrated mission systems due to the timing of contracts more than offset low single- digit growth in the firm’s other segments. Sales activity was strong, the firm posted book/bills above 1 in three of the firm’s four segments, indicating that the firm’s revenue pipeline remains robust.

Financial Strength

L3Harris is in solid financial shape. The firm increased debt by about $4.5 billion in 2015 to fund the acquisition of Exelis, a sensor-maker that was spun off from ITT and had been paying down debt since. The firm’s all-stock merger of equals with L-3 Technologies did not dramatically increase debt relative to size, and projecting a 2021 gross debt/EBITDA of roughly 2.1 times, which is quite manageable for a steady defense firm. 

While L3Harris has some exposure to commercial aviation (depending on definitions, roughly 5% -15% of sales), The firm will be materially affected by the downturn in commercial aviation. L3Harris produces a substantial amount of free cash flow and is not especially indebted, so we anticipate that the company would be able to access the capital markets at minimal cost if necessary. 

Bulls Say’s

  • There is substantial potential for cost synergies from the merger with L-3 due to the decentralized organizational structure of the pre-merger entity.
  • L3Harris is at the base of a global replacement cycle for tactical radios, which we think will drive substantial growth.
  • Defense prime contractors operate in an a cyclical business, which could offer some protection as the U. S. is currently in a recession.

Company Profile 

L3Harris Technologies was created in 2019 from the merger of L3 Technologies and Harris, two defense contractors that provide products for the command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR) market. The firm also has smaller operations serving the civil government, particularly the Federal Aviation Administration’s communication infrastructure, and produces various avionics for defense and commercial aviation.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.