Reporting strong earnings yesterday, defense contractor Harris Corporation's (LHX 0.27%) shares embarked upon a quick, strong burst of activity, rising 5.6% over the course of the trading day. Why?

In at least one respect, Harris' numbers weren't very impressive after all. Fiscal Q1 2014 revenues of $1.19 billion actually fell short of consensus expectations, and were down more than 5% year over year. However, Harris' other numbers quickly made up the difference:

  • Harris' cost of goods sold dropped 9%, helping to boost pre-tax earnings from continuing operations, despite the revenue drop.
  • Earnings per share from continuing operations of $1.18 exceeded analyst estimates by $0.05, helped by a 5% drop in the company's share count.
  • Company-wide net profits turned positive, a reversal of Harris' year-ago $86 million loss.
  • Free cash flow -- real cash profits -- exceeded the net profit number, coming to $139 million.

Meanwhile, new orders taken in in the quarter amounted to some $1.2 billion, outstripping revenues booked. All in all, Harris turned in a fine performance in an environment marked by widely reported cuts in defense spending in Washington.

Valuation matters
Does management's performance navigating troubled waters translate into the company being worth 5.6% more today than it sold for yesterday?

Actually, possibly, yes. Harris reaffirmed its earnings guidance for the rest of the year yesterday, positing profits from continuing operations of about $4.75 per share at the midpoint. That's more than four times what Harris earned last year (when earnings were hurt by a big charge for discontinued operations), and suggests that Harris could perform better this year than we've seen it do in any of the past five -- which is surprising, given that management continues to forecast revenue declines.

Meanwhile, as GAAP "earnings" swing wildly, Harris continues to steadily churn out cash. Over the past 12 months, the company has produced free cash flow of $727 million -- meaning its price to free cash flow is now a lowly 9.2. Even with revenues shrinking, and profits expected to stagnate over the next five years, that's hardly a high price to pay for a brand-name defense contractor paying a 2.8% dividend yield.

While the stock may not appeal to growth investors, shareholders who are seeking a steady dividend income from a company with reliable cash flows and competent management should take a close look at Harris.