Jim Cramer Explains How He Would Approach L3Harris (LHX)

During the October 7 episode of Mad Money, a viewer inquired whether it would be unwise to consider investing in L3Harris Technologies, Inc. (NYSE:LHX). Jim Cramer offered a positive perspective, stating, "No, actually, I kind of like L3Harris, to tell you the truth. I've actually been looking at it, and I've been saying this: it just isn't that bad. I mean, it sells at like 10 times or eight. Well, no, it's got a discount to the S&P multiple, but it just shouldn't be going down and down and down."

Cramer advised a gradual approach to building a position in the stock rather than trying to pinpoint the lowest price. He explained, "Where do you pick a bottom? I don't know. We talk about this a lot at the Club. How do you pick a bottom in a stock like L3Harris? You don't. Say you want to buy 100 shares, buy 25 here, and then you use three, five-point increments to be able to get it. It's a $230 stock. You divide it by 10; look at it like a $23 stock. Buy your first at 23, and then you buy it down to 20. And I think you're going to find you got… a really good basis."

L3Harris Technologies is currently ranked seventh on a list of the ten best defense stocks to buy within the S&P 500. Investors are encouraged to explore which six defense stocks garnered more interest from hedge funds and ranked higher than LHX.

In terms of financial performance, L3Harris reported second-quarter orders totaling $7.3 billion, resulting in a book-to-bill ratio of 1.2, which has contributed to a record backlog of $42 billion. The company's revenue saw an increase of 8%, reaching approximately $5.9 billion, while diluted earnings per share (EPS) rose by 28% to $3.13. Additionally, free cash flow jumped by 37% to $771 million.

The Missile Solutions segment experienced a revenue boost of 14%, totaling around $1.05 billion, driven by heightened production and developmental activities. The Communications & Spectrum Dominance sector also showed improvement, with its operating margin increasing from 24.6% to 26.9%. These positive developments likely underpin Cramer's enthusiasm for the stock, despite its recent struggles. A noteworthy $60 million contract from the Air Force for a sensor exemplifies the ongoing demand, although its significance is more about its context within L3Harris's missile operations than the contract's value itself.

However, a decrease in the share price does not eliminate the risks associated with contracts. L3Harris noted that the transition from defense orders to profitable deliveries can take considerable time. The company highlighted that fixed-price contracts could lead to losses if actual costs surpass estimates and adjustments cannot be negotiated. Consequently, factors like inflation, execution challenges, and production costs remain critical even in times of strong demand.

The latest quarterly results also revealed varying performance across different segments. The operating margin for Space & Mission Systems decreased to 9.8%, down from 10.4%, primarily due to an asset-sale gain recorded in the previous year. Similarly, the margin for Missile Solutions slightly dipped from 12.5% to 12.3%, reflecting the absence of a favorable contract resolution seen in the prior year. L3Harris's involvement in space-related projects connects it with a rapidly growing sector that has a distinct financial profile, raising questions about the relative attractiveness of investments in both L3Harris and its competitors engaged in similar missions.