Is L3Harris the Best Defense Play Amid Increased Military Spending?

This article first appeared on GuruFocus.

L3Harris Technologies (NYSE: LHX) may not carry the household name status of defence giants Lockheed or Raytheon, but I wouldn't mistake that for irrelevance. With a market cap just shy of $48 billion, and over 120 years in operation, L3Harris has quietly positioned itself as one of the most strategically important players in the entire sector. Headquartered in Melbourne, Florida, the company operates across four primary segments: Space & Airborne, Integrated Mission, Communication, and Aerojet Rocketdyne, all playing a critical role in the rapidly evolving national and international security environment.

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In my view, this isn't a legacy contractor simply clinging to old business. It's an agile, forward-looking tech defense firm assembling all the right pieces to lead. And while the geopolitical and economic future is increasingly uncertain, I'd say that after a muted 14% move in the share price in an otherwise bullish environment, the market may be underestimating just how well-positioned the firm already is. I'm initiating a Buy rating on the company as a result.Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://www.gurufocus.com/stock/lhx

L3Harris Looking to the Future

While other firms in the sector generally focus on massive platform contracts, L3Harris leans into technology-heavy subsystems, the kind of high-margin, mission-critical hardware and software that are increasingly in demand.Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://www.gurufocus.com/stock/lhx/stock-analysis

Space & Airborne Systems- delivers advanced satellite payloads, space sensors, and complete mission solutions for high-orbit operations. As space becomes increasingly contested, many government officials will consider these capabilities as essential. Integrated Mission Systems- electronic warfare and ISR (intelligence, surveillance, reconnaissance) programs. These technologies serve as the eyes and ears of the modern battlefield, where data and speed matter as much as, if not more, than firepower. Communication Systems- provides the tactical comms, satellites, secure networks, and battlefield software, the requirements for effective collaboration. Aerojet Rocketdyne- the propulsion giant acquired in a move that I would contend deserves much more attention from investors.Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://files.quartr.com/conference-calls/91a97-2025-04-24-11-10-21.pdf

The Aerojet Acquisition Is a Big Deal

I'm generally impressed by the moves made in recent years. In acquiring Aerojet Rocketdyne specifically, L3Harris did far more than add another division, it filled a critical gap in the portfolio. With Aerojet, the company now controls key technologies in missile propulsion, strategic deterrent systems, and deep-space launch engines.

Story Continues

This move bolsters its role in programs like hypersonics, missile defense, and nuclear modernization, three priority areas of the U.S. defense budget.

Many will also point to the fact that it de-risks the business, by adding a long-cycle, platform-agnostic revenue stream. Rocket engines are obviously needed across a range of systems, providing exposure to dozens of Pentagon programs without necessarily having to win the entire contract.

Where vertical integration is often plagued by bureaucracy, L3Harris has managed to become more self-sufficient without bloating its structure, giving it plenty of potential for further growth going forward, as guidance for the next year suggest, representing about 7% growth in ESP.

Quality Growth at a Reasonable Valuation

Despite its strategic strengths, L3Harris trades at a valuation that still looks reasonable, even attractive, from an investor perspective, with some impressive numbers in the Q1 2025 results, most notably that $33 billion backlog.Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://files.quartr.com/conference-calls/91a97-2025-04-24-11-10-21.pdf

A Price to Sales ratio of 2.20 may seem a tad rich compared to the sector median of 1.53, but this reflects its growing exposure to higher-margin tech and aerospace programs. More importantly, Price to Book is just 2.42, below the sector median of 2.91, a potential indicator that the market hasn't fully priced in the company's long-term asset value.

Profitability remains solid, with a 19% EBITDA margin, well ahead of peers. EPS growth came in at 37% year over year, which may answer some concerns about execution risk. While forward EPS is expected to dip slightly (-1%), that guidance appears conservative, particularly given strong order momentum, a robust defense budget environment, and the company's history of beating forecasts.Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://www.gurufocus.com/stock/lhx/earnings

NATO members currently spend about 2.61% of their combined GDP on defense, equivalent to roughly $1.3 trillion annually in core defense. The June 2025 summit committed to raising this to 5% of GDP by 2035, which would lift annual spending to around $1.75 trillion, an increase of roughly $450 billion each year. If even a modest portion of that uplift flows into L3Harris's core markets, space, airborne systems, integrated missions, and propulsion, the backlog and revenue base could expand materially beyond today's ~$33 billion level. Combined with its history of beating forecasts, these dynamics suggest the market may still be underestimating its growth potential by a decent scale.

Recent downward analyst revisions (20 in the past 90 days) may appear concerning at first glance, but they present a possible contrarian opportunity. Many of the revisions were tied to accounting adjustments and integration-related assumptions, not underlying demand or execution. As these concerns abate, estimates could be revised upward again, especially if margins hold. I'm more focussed on the actions of insiders, who look to be buying shares consistently.Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://www.gurufocus.com/stock/lhx/insider-trading

L3Harris is Specialising, but At Scale

L3Harris doesn't aim to be the next Lockheed Martin or Boeing, and I'd say that's probably a good thing. Its strength lies in being fast, focused, and technical.Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://www.gurufocus.com/stock/lhx/similar-stocks

Where the giants of the sector get bogged down in multibillion-dollar aircraft programs with slow burn timelines, L3Harris is often the provider of the advanced systems those aircraft rely on: jamming pods, secure comms, electronic warfare suites, satellite links, and avionics. These are naturally less visible, but potentially just as essential, typically coming with better margins and faster turnaround cycles.

The company's unique stance as both component supplier, and systems integrator gives it rare agility in the defense ecosystem. It can win prime contracts where needed, but also play across multiple programs as a high-value subcontractor. That's an ideal position in an era where modularity and interoperability are driving military procurement strategies.

And with programs like JADC2 (Joint All-Domain Command and Control) gaining traction, L3Harris is one of the few firms already supplying the connective tech needed to make that vision real.Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://www.rti.com/blog/jadc2-enabling-the-data-centric-enterprise

Wall Street Looks Bullish Too

While the analyst community has been rightfully cautious in recent months, largely due to near-term integration risks, the longer-term outlook is turning increasingly positive.

L3Harris recently secured a 1.1 billion contract with the Dutch Ministry of Defense, extending its international reach and aligning with NATO's modernization goals. Combined with its strengthening relationship with U.S. agencies and the DoD, these wins suggest a pipeline of consistent revenue ahead.

Valuation-wise, several analysts see upside to the $280 range, albeit with some looking down towards $212. With a 2.2% dividend yield and a business model that's both profitable and durable, L3Harris starts to look like a compelling core holding for any defense-focused portfolio, resulting in a Strong Buy rating overall.Is L3Harris the Best Defense Play Amid Increased Military Spending?Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://www.gurufocus.com/stock/lhx/forecast

Some Concerns Remain

While the long-term outlook remains positive, I suggest there are several risks which potential investors may wish to monitor. The largest short-term challenge for me stems from the ongoing integration of Aerojet Rocketdyne. Although management has laid out clear synergy targets, integrating a complex propulsion business brings execution risk, particularly around cost controls, regulatory compliance, and workforce alignment.

Additionally, macro-level budget uncertainty remains a factor. While bipartisan support for defense funding is strong in the U.S., any prolonged government shutdowns, continuing resolutions, or changes in political rhetoric could easily delay new contract awards or alter program priorities, especially as questions are asked about the level of national debt relative to GDP.Is L3Harris the Best Defense Play Amid Increased Military Spending?

https://www.fdd.org/analysis/2024/12/05/u-s-defense-spending-visualized/

Lastly, and as many would expect, amid the ongoing tariff debacle, supply chains continue to be a worry. Although management has taken steps to reduce dependency on third-party suppliers, parts and materials shortages, especially in microelectronics, could affect program delivery timelines and increase costs.

A Strategic Buy for the Long Term

L3Harris Technologies is exactly the kind of company that tends to get overlooked, of course until it isn't. It doesn't dominate headlines, but its technologies are embedded in nearly every major U.S. defense initiative. It doesn't have the scale of a Lockheed, but it doesn't really need it either. From my perspective, its edge lies in precision, adaptability, and innovation.

With its Aerojet acquisition deepening its strategic moat, its financials showing resilience, and its valuation still reasonable, LHX offers a compelling mix of quality and growth. Yes, there are risks, integration is never easy, and geopolitical uncertainty can cut both ways. But this is a company built to navigate complexity.

The verdict? I'd say this is a Buy. Not exactly the flashy kind, but the steady, rewarding kind, which quietly builds wealth while reshaping the modern battlefield behind the scenes.

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