What happened
A new defense powerhouse was born in 2019, and the market so far has reacted enthusiastically. Shares of L3Harris Technologies (LHX -0.17%) gained 46.95% for the year, according to data provided by S&P Global Market Intelligence, as the market warmed to what had been for a long time an underappreciated defense stock .
LHX vs. S&P 500 data by YCharts
So what
In June defense electronics specialist Harris completed its acquisition of L3 Technologies and rebranded itself as L3Harris. The deal combined two midsize defense companies with separate, but adjacent, focuses, based on the idea that together they could compete for Pentagon contracts that neither could hope to win on its own.
Pre-merger Harris was focused on battlefield management, communications, and classified space work, while L3 was known as a maker of a range of sensors and night-vision equipment.
Image source: Getty Images.
Harris was an outperformer even before the deal closed, with shares jumping in February after the company reported earnings that came in ahead of expectations and orders up 27% year over year. The trend continued in the second half of the year after the deal closed, with L3Harris in October again beating Wall Street expectations fueled by 20% revenue growth in space and 11% in communications systems.
Now what
L3Harris' strong performance in 2019 means the company is no longer the bargain it once was, with the stock trading at 26.7 times earnings compared to Northrop Grumman's 21.2 multiple and Lockheed Martin's 19.7.
The bull case for L3Harris today is that management is still integrating the merger and identifying noncore assets for divestiture. Those corporate actions, when they happen, could raise margins by making top-performing businesses a bigger piece of the overall pie, and generate cash to be reinvested in the business or returned to shareholders.
L3Harris is well positioned in areas like space and military modernization that are Pentagon priorities and should find new opportunities to generate organic growth in 2020. What was once the defense sector's most underappreciated company is no longer unappreciated, but there is plenty of opportunity for further growth in the new year.
