Will Weak Revenues Hit Harris Corp's (HRS) Q3 Earnings? - Analyst Blog

Harris Corporation HRS is scheduled to report its third-quarter fiscal 2015 financial numbers on May 5, before the opening bell.

Last quarter, Harris had delivered a 12.82% positive earnings surprise – the sixth successive earnings beat by the company – on the back of higher-than-expected revenues. Let’s see how things are shaping up ahead of this announcement.

Factors at Play

There is very little surprise element left in Harris’ third quarter results as the company has already announced its third quarter preliminary results on Apr 21. As of that date, the company declared third quarter preliminary earnings (on an adjusted basis) of $1.32 per share, up 3.9% year over year. The company stated that the fiscal third quarter results have benefited from a lower tax rate apart from the cost control measures undertaken.

However, Harris’ third quarter preliminary results were characterized by revenue weakness due to soft revenues from Public Safety, IT Services and CapRock energy operations. Third quarter preliminary revenues declined 6.3% year over year to $1.19 billion.

It is worth noting that Harris primarily depends on U.S. government contracts for a major portion of its revenues. Any federal budgetary pressure would thus result in substantial cuts in defense spending, which will significantly impact the company’s business.

We now await a detailed update from Harris on its impending acquisition of Exelis, Inc. XLS. At the time of announcing the deal, Harris Corporation had said that it expects the transaction to close in Jun 2015.

With preliminary results already announced, it would be interesting to see whether the actuals show any discrepancy from the same when the quarter’s numbers are announced on May 5.

Earnings Whispers

Our proven model does not conclusively show that Harris is likely to beat the Zacks Consensus Estimate this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below:

 Zacks ESP: Earnings ESP represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate. Thus, the ESP for Harris stands at -0.81% as the Most Accurate estimate is pegged at $1.22 while the Zacks Consensus Estimate stands higher at $1.23.

 Zacks Rank: Harris’ Zacks Rank #2 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

Note that the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.

Stocks to Consider

 Here are some companies to consider as our model shows they have the right combination of elements to post an earnings beat this quarter.

DIRECTV DTV carries a Zacks Rank #3 and an earnings ESP of +1.32%. The company will report its first-quarter results on May 5, before the commencement of trading.

IGATE Corp. IGTE carries a Zacks Rank #3 and an earnings ESP of +2.38%. The company will report its quarterly results on May 5, after the conclusion of trading.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
HARRIS CORP (HRS): Free Stock Analysis Report
 
DIRECTV (DTV): Free Stock Analysis Report
 
IGATE CORP (IGTE): Free Stock Analysis Report
 
EXELIS INC (XLS): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research