L3HARRIS TECHNOLOGIES, INC. /DE/ (LHX) stock intrinsic value fair value estimate & owner earnings analysis

WHAT THE BUSINESS IS. L3Harris Technologies is one of the largest U.S. defense contractors. It was formed by the June 2019 merger of Harris and L3 Technologies and added Aerojet Rocketdyne in July 2023. Its products include tactical radios, satellites and space sensors, electronic warfare, airborne surveillance and mission systems, and, through Aerojet Rocketdyne, solid rocket motors for missiles such as PAC-3, Standard Missile, GMLRS and Javelin, along with the RS-25 engine. From 2026 it reports three segments: Space & Mission Systems, Communication & Spectrum Dominance, and Missile Solutions. In 2025, 75% of revenue came from the U.S. Government (including foreign military sales) and about 22% came from international customers (including foreign military sales) in more than 100 countries, with no single foreign country above 5%. Also in 2025, 75% of revenue came from fixed-price contracts. That is the main operating risk: a cost overrun on a development program falls on L3Harris. Contracted backlog was a record $42.0 billion at July 2026, up from $38.7 billion at the start of the year and $34.2 billion a year earlier. That is close to two years of revenue already under contract. HOW WE MEASURED EARNINGS. We start from operating cash flow and remove working-capital swings, stock compensation and the capital spending needed to maintain the business. L3Harris pays its 401(k) match in company stock, about $250 million a year. The cash flow statement adds this back as non-cash, but it is a real labor cost paid in newly issued shares, so we charge it like stock compensation. This lowers owner earnings by about $1.35 per share a year. On this basis, owner earnings per share were $9.40 in 2020, $9.21 in 2021, $7.71 in 2022, $8.00 in 2023, $11.25 in 2024 and $12.23 in 2025. Taxes distort the 2022-2025 figures. From 2022, U.S. tax law required research costs to be capitalized. That raised L3Harris's cash taxes and built up a tax asset of $1.69 billion by the end of 2024. The 2025 tax law restored immediate expensing, and $449 million of that asset reversed in 2025. So 2022-2024 understate normal earnings and 2025 slightly overstates them. We remove these timing effects and count the remaining $1.25 billion asset separately, as future tax savings worth about $0.9 billion today. Amortization of acquired intangibles (about $0.77 billion in 2025) and goodwill write-offs ($802 million in 2022, $296 million in 2023) are added back as past acquisition costs. Programs and technologies age, so the cases do not assume they last forever without replacement. THE STARTING LEVEL. We value the business before its lenders and then subtract what it owes. Cash flow before interest, adjusted for the tax timing, ran between 11.2% and 15.8% of revenue in the six years since the merger, with a median of about 12.6%. Applied to the $21.9 billion of revenue the company already reached in 2025, that gives about $2.77 billion. We trim this slightly for the majority stake in the commercial space propulsion business sold in August 2026 and start at $2.7 billion a year, about $14.40 per diluted share. After roughly $0.6 billion of annual interest, that leaves about $11.20 per share for owners. We used the median across the whole post-merger period rather than the strongest two years. The latest year (2025, 11.2% after removing the tax reversal) sits below this level, while first-half 2026 net income rose 32% on 10% higher revenue. WHAT IT OWES. Borrowings were about $11.0 billion at July 2026, including finance leases. We credit about $1.0 billion of cash beyond operating needs and about $0.5 billion received in August 2026 for the 60% stake in the space propulsion business. We subtract the U.S. Department of War's $1.0 billion convertible preferred investment in the Missile Solutions business, which ranks ahead of L3Harris shareholders in that unit, and add back the roughly $0.9 billion of future tax savings. Net claims ahead of shareholders come to about $9.6 billion, or about $51 per share. The debt is investment grade and carries an average cash cost of about 5.6%. Even the bear-case trough covers interest about three times. BASE CASE ($235.63). Growth of 4%, 4% and 3% in the first three years as the record backlog converts to revenue. Then 1.5% a year through year ten, from repricing follow-on production lots at current costs. After that, earnings stay flat at about $3.3 billion. L3Harris and its predecessors have held franchises in tactical radios, space payloads and rocket propulsion for more than fifty years, and we assume incumbency keeps that level going. We credit no growth from bigger defense budgets, new markets or margin expansion. Owner earnings per share grew 8.7% in 2025, so the 4% first-year assumption is below the latest actual rate. The business is worth about $53.8 billion. After $9.6 billion owed, shareholders have $44.2 billion, or $235.63 per share. BEAR CASE ($143.76). A repeat of the 2011-2015 Budget Control Act drawdown. In that period total U.S. defense spending fell about 19% in nominal terms, L-3's revenue fell about 23% and legacy Harris's about 15%. Backlog holds cash flow near $2.5-2.6 billion for two years. Then revenue falls about 15% and margins slide back to the 2022-2023 level, worsened by fixed-price charges like those of 2022-2023. Cash flow troughs at about $1.9 billion in years five and six. It recovers only to $2.2 billion by year ten, which allows for lost recompetitions, and stays there. The business is worth about $36.5 billion. After $9.6 billion owed, shareholders have $27.0 billion, or $143.76 per share. Debt stays serviceable throughout. BULL CASE ($330.73). The company's own levers work. Cost savings already achieved hold margins near the 2024-2025 level, about 14%, for a start of about $3.05 billion. Solid rocket motor capacity already funded and under construction, partly with the Department of War investment, converts multiyear munitions demand into 6% growth for three years. Growth is then 3.5% through year ten, after which earnings stay flat at about $4.6 billion. The business is worth about $71.6 billion. After $9.6 billion owed, shareholders have $62.0 billion, or $330.73 per share. WHAT CHANGED. Previous figures for this company were built on a different basis and are not comparable. Since the last review, L3Harris has delayed the Missile Solutions IPO to 2027 at the earliest, sold control of its commercial space propulsion business, and replaced its chief executive in August 2026. It also raised its 2026 outlook and grew backlog to $42 billion. The leadership change does not alter the earnings level, but it adds uncertainty about how capital will be deployed. MARGIN-OF-SAFETY PRICE ($135). We are fairly confident in the earnings level. Cash flow has been positive every year, the business sells mostly to the U.S. government under multiyear contracts, and about two years of revenue is already under contract. What we can't pin down is the margin on fixed-price work. The worst plausible outcome is a budget squeeze like 2011-2015 together with a large fixed-price development loss. The structure would survive it: net claims are about 3.5 times normal cash flow and the debt is investment grade, assets are specialized plants and cleared workforces, and the one customer is also the regulator but has no substitute for several of these products. If we are wrong about both the margin and growth, and cash flow simply stays near $2.25 billion forever, the shares are worth about $149. Over the holding period, owners receive a dividend of about $5 per share plus steady buybacks. At $135 the bear case is still worth slightly more than that price, and if the base case plays out over three to four years, the base case implies a return including dividends above 20% a year. Above that price, the fixed-price risk and the new management team leave too little room to reach 20% if things go wrong. We leave out the six-month transition period after the 2019 merger. We also don't use the pre-merger Harris years, which describe a smaller, different business and are distorted by voluntary pension contributions of $400 million in fiscal 2017 and about $300 million in fiscal 2018.