L3Harris Technologies $LHX is Fairly Priced. A Deep Dive into Its Intrinsic Value

L3Harris presents a compelling case for investors.

L3Harris Technologies (LHX), a prominent player in the aerospace and defense sector, has been on investors’ radars due to its stable cash flows and strategic position in a resilient industry. With its stock trading at $249.67 as of June 22, 2025, the question arises: Is LHX undervalued, overvalued, or fairly priced? To answer this, I conducted a detailed valuation analysis using the Buffett and McGrew Valuation Methods, leveraging five years of financial data to estimate the intrinsic value per share. Additionally, I calculated the Trailing 12-Month (TTM) Return on Equity (ROE) and Return on Net Tangible Equity to provide a broader perspective on LHX’s financial health. Here’s what the numbers reveal and why LHX might be an attractive opportunity for value investors.

Understanding the Valuation Methods

The Buffett Valuation Method, inspired by Warren Buffett’s discounted cash flow (DCF) approach, focuses on projecting a company’s free cash flow (FCF) over 10 years, discounting it to present value, and adding a terminal value to estimate the company’s worth. For LHX, classified as a non-growth stock due to a negative 5-year FCF Compound Annual Growth Rate (CAGR) of -1.29%, I applied a conservative 5% growth rate for the projection period and a 2.5% perpetual growth rate, with an 8% discount rate (4% Treasury yield + 4% risk premium).

The McGrew Valuation Method adjusts growth assumptions for companies with varying growth profiles. However, since LHX’s FCF CAGR is below 10%, the McGrew method defaults to the same parameters as the Buffett method for non-growth stocks, resulting in identical calculations.

Data Inputs and Calculations

Using financial data from LHX’s quarterly cash flow and balance sheet reports, I gathered the following key inputs:

• Free Cash Flow (2024): $2,269,000,000, the TTM FCF as of 03/31/2025, served as the starting point for projections.
• Shares Outstanding: 187,593,750, based on the most recent quarter (03/31/2025).
• 5-Year FCF Data (2020–2024): $2,422M, $2,345M, $1,906M, $1,647M, $2,269M, yielding a negative CAGR.
• Last Closing Price: $249.67, assumed to be the most recent trading day’s price.

For both valuation methods, I projected FCF for 10 years at 5% growth, calculated the terminal value, and discounted all cash flows to present value. The total present value of $50,391,841,387 divided by 187,593,750 shares resulted in an intrinsic value per share of $268.58. Applying a 25% margin of safety, the price target is $201.44.

Valuation Status: A Buy Signal

To determine LHX’s valuation status, I compared the closing price ($249.67) to the intrinsic value ($268.58):

• Screaming Buy: Price ≤ $201.44 (75% of intrinsic value)
• Buy: Price between $201.44 and $249.78 (75%–93% of intrinsic value)
• Hold: Price between $252.47 and $362.58 (94%–135% of intrinsic value)
• Overvalued: Price > $362.58

With a closing price of $249.67, LHX falls within the Buy range, suggesting it is slightly undervalued. This indicates potential upside for investors seeking value, though not at a deep discount.

Valuation Table

Financial Health: ROE and Return on Net Tangible Equity

To complement the valuation, I calculated LHX’s TTM ROE and Return on Net Tangible Equity:

• ROE: Using TTM Net Income from Continuing Operations ($1,605,000,000) and Average Shareholders’ Equity ($19,120,750,000), ROE is 8.39%. This aligns with industry peers and indicates moderate efficiency in generating profits from equity capital.
• Return on Net Tangible Equity: With Average Net Tangible Equity at -$9,005,000,000, the return is -17.82%. The negative value reflects LHX’s significant intangible assets (e.g., goodwill from acquisitions), common in the defense sector. This metric is less informative due to the negative equity but highlights the company’s reliance on intangibles.

Why LHX Could Be a Compelling Investment

LHX’s position in the aerospace and defense industry offers stability, driven by consistent government contracts and global demand for advanced technologies. Despite a negative FCF CAGR, the company’s 2024 FCF of $2,269 million demonstrates resilience. The conservative 5% growth assumption used in the valuation mitigates risks associated with the negative CAGR, aligning with the document’s guidance for stable firms.

The Buy rating suggests LHX is trading below its intrinsic value, offering a potential margin of safety for investors. The stock’s proximity to the upper end of the Buy range ($249.78) indicates caution, as it’s not a deep value play. However, the 8.39% ROE supports the case for a fundamentally sound company, and the negative Return on Net Tangible Equity is less concerning given the industry’s asset structure.

Risks and Considerations

Investors should note several risks:

• Negative FCF Growth: The -1.29% CAGR raises concerns about future cash flow growth, though the 5% projection rate is conservative.
• Macroeconomic Factors: Defense budgets and geopolitical dynamics could impact contracts.
• Data Limitations: The analysis relied on provided financials without real-time market verification, and the closing price ($249.67) was assumed accurate.
• Intangible Assets: High intangibles contribute to negative tangible equity, which may affect certain financial ratios.

L3Harris Technologies presents a compelling case for value investors in 2025. With an intrinsic value of $268.58 and a closing price of $249.67, LHX earns a Buy rating, suggesting it’s slightly undervalued. The company’s stable cash flows, moderate ROE, and strategic industry position bolster its appeal, though investors should monitor FCF trends and macroeconomic risks. For those seeking a margin of safety in a resilient sector, LHX could be a portfolio addition worth considering.

#LHX #StockValuation #ValueInvesting #AerospaceDefense #BuffettValuation #McGrewValuation #StockMarket2025 #Investing #ROE #IntrinsicValue #FinancialAnalysis #StockPicks #XInvesting