Is Harris Corp. Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Harris Corp.'s (NYS: HRS) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Harris' story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always be reported at a steady rate, we'll also look at how much Harris' free cash flow has grown in comparison to its net income.


A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Harris' share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Harris managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

Healthy dividends are always welcome, so we'll make sure that Harris' dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Harris' key statistics:

HRS Total Return Price Chart

HRS Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue Growth > 30% 8.9% Fail
Improving Profit Margin 39.1% Pass
Free Cash Flow Growth > Net Income Growth 15.3% vs. (19.3%) Pass
Improving Earnings per Share 36.8% Pass
Stock Growth (+ 15%) < EPS Growth 94.3% vs. 36.8% Fail

Source: YCharts. * Period begins at end of Q2 2009.


HRS Return on Equity Chart

HRS Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving Return on Equity(19.6%)Fail
Declining Debt to Equity53.2%Fail
Dividend Growth > 25%68.2%Pass
Free Cash Flow Payout Ratio < 50%21.7%Pass

Source: YCharts. * Period begins at end of Q2 2009.

How we got here and where we're going
Harris turns in a passable performance, with five of nine possible passing grades. The company's weakness this year undid a period of across-the-board growth, leaving the company to lick its wounds while refocusing.

Harris' lousy year has been blamed on government cutbacks, so the possibility of a fiscal cliff to fall off probably keeps Harris' management up at night. The pain started last year when the Pentagon canceled a Ground Mobile Radio program Harris had worked on with Boeing (NYS: BA) , Rockwell Collins (NYS: COL) , and Northrop Grumman (NYS: NOC) . That axed nearly $20 billion in potential payouts for the companies. Boeing and Northrop have plenty of other defense contracts to fall back on, but smaller Rockwell and Harris could be feeling the pain of that loss for a while.

Harris has been compensating for declining defense spending by taking full advantage of its telecom expertise. The company's developed a line of secure mobile devices, including a tablet and a recently unveiled smartphone, aimed at the large public safety community.

The devices, which run Google's (NAS: GOOG) Android operating system and (at least in the smartphone's case) can operate on both commercial and private cellular networks and offer a valuable bridge between the unsecured world of consumer mobile devices and the secure-communication needs of those who protect and serve.

The company should be able to charge a nice premium over iPhones and Nexuses for these rugged special purpose devices. With over 1.3 million employed policemen, firefighters, and paramedics in the United States alone, the company also has a fairly large base of potential sales as departments upgrade to modern technology.

Putting the pieces together
Harris has some of the qualities that make up a great stock, but no stock is truly perfect. These numbers are likely to change over time, so it's important to keep track of Harris' progress. The Fool is here to help. When you add Harris to your free personalized Watchlist, you'll get updates whenever we uncover any news you'll need.

Some stocks have done much better than others in this new era of government belt-tightening. Knowing which way the wind's blowing on Capitol Hill can help you invest in Uncle Sam's favorite companies before the market finds out. Want to learn more? The Fool's free report on stocks that could skyrocket after the 2012 election mentions four opportunities, but November's coming up fast. Click here to get the free information you need, while there's still time.

The article Is Harris Corp. Destined for Greatness? originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool owns shares of Google and Northrop Grumman. Motley Fool newsletter services have recommended buying shares of Google. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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