Will Merger Related Costs Mar L3Harris' (LHX) Q3 Earnings?

L3Harris Technologies, Inc. (NYSE:LHX) is scheduled to release third-quarter 2019 results on Oct 30, before the opening bell.

The upcoming quarterly results are expected to primarily reflect the impact of L3 Technologies’ successful merger completion with Harris Corp in July 2019.

Let’s take a detailed look at this and the other factors that may have influenced the company’s performance in the soon-to-be-reported quarter.

Factors at Play

At the onset of third-quarter 2019, L3Harris Technologies was formed following the merger of L3 Technologies and Harris Corp. Following the merger, joint efforts of these two industry leading corporations are expected to have boosted the combined company’s top line.

In July, L3Harris delivered its eighth navigation payload to GPS III satellite prime contractor Lockheed Martin (NYSE:LMT) . Such deliveries must have translated into positive revenue recognition for L3Harris in the third quarter. Further, in August, the company’s training center for commercial airline pilots was inaugurated in London. The training center has already been witnessing strong demand, with 15 international airlines training pilots at the site. So, by the end of third quarter, we expect this training center to have generated sufficient revenues, in turn, contributing to L3Harris’ quarterly top line.

The Zacks Consensus Estimate for L3Harris’ third-quarter revenues is pegged at $4.45 billion, indicating a massive 188.7% surge from the year-ago quarter’s reported figure.

Positive synergies from the completion of the aforementioned merger deal are likely to have bolstered L3Harris’ third-quarter earnings. However, higher merger related cost may have marred the combined company’s bottom-line growth.

This may be the reason why the consensus estimate for L3Harris’ third-quarter earnings of $2.39 per share indicates growth of only 34.3% from the year-ago quarter’s reported figure, much lower than the projected revenue growth percentage.

Moreover, in July, L3Harris’s management approved a 10% increase in its quarterly cash dividend rate, effective from third-quarter of 2019. Its management also approved a new $4 billion share repurchase authorization, with further expectation to repurchase $2.5 billion in shares outstanding over the following twelve months. Such abundant capital deployment strategy hints at strong cash flow generation by the company, which the soon-to-be-reported quarter’s results are likely to reflect.

During the third quarter, L3Harris completed the previously announced sale of the Harris Night Vision business to Elbit Systems for $350 million in cash. We expect further updates on this divestment in the third-quarter announcement.

Earnings Whisper

Our proven model does not conclusively predict an earnings beat for L3Harris this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here

L3Harris has an Earnings ESP of -0.70% and a Zacks Rank #3. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are some defense companies you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Leidos Holdings Inc. (NYSE:LDOS) is scheduled to report third-quarter 2019 results on Oct 29. The company has an Earnings ESP of +1.52% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Huntington Ingalls Industries, Inc. (NYSE:HII) is set to report third-quarter 2019 results on Nov 7. The company has an Earnings ESP of +2.09% and a Zacks Rank #3.

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