L3Harris Technologies, Inc.

LHX Details

Achievement of Industrial Security Practices Award: L3Harris Technologies, Inc. (NYSE: LHX) is engaged in the provision of advanced defence and commercial technologies across air, land, sea, space and cyber areas. The market capitalization of the company as on 16 June 2021, stood at ~$45.50 billion. As per a recent update, the U.S. Department of Defence has recognized the company with the highest industrial security practices award - James S. Cogswell Outstanding Industrial Security Achievement Award, for the 17^th consecutive year.

Q1FY21 Results Update: The company reported a revenue of $4.6 billion during the period, reflecting a decrease of 1.3% on the prior-year period. The net income margin stood at 10.2% and GAAP earnings per share from continuing operations at $2.25. The operating cash flow stood at ~$661 million during the period. The management declared a quarterly dividend of $1.02 per share.

Cash Position (Source: Analysis by Kalkine Group)

Key Risks: The company has high debt on its balance sheet, which poses a risk of impact to the profitability of the company in terms of increased interest payments.

Outlook: The company has raised its 2021 non-GAAP EPS guidance to $12.70-$13, compared to the previous guidance range of $12.60-$13, on the back of strong operational execution by the team in Q1. It expects revenue to be in the range of $18.5 billion - $18.9 billion and an adjusted EBIT margin of 18% - 18.5% in FY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: LHX has recently introduced its new XL Extreme 400P Emergency Responder Radio, a handheld radio designed to meet extreme environmental conditions for emergency responder communications. The stock of LHX is trading close to its 52-weeks’ high levels of $224.60. The stock of LHX gave a positive return of ~21.84% in the past nine months and a positive return of ~19.26% in the past six months. On a technical analysis front, the stock of LHX has a support level of ~$203.66 and a resistance level of ~$224.52. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price with a correction of low single-digit (in % terms). We believe that the company can trade at a slight premium to its peer average EV/Sales (NTM trading multiple), considering the resilient performance in a difficult time of operations and upgraded guidance of the company. For this purpose, we have taken peers such as Boeing Co (NYSE: BA), Northrop Grumman Corp (NYSE: NOC), Raytheon Technologies Corp (NYSE: RTX), to name a few. Considering the current high trading levels and indicative valuation, recent rally in the stock price, uptick in debt-to-equity ratio and the key risks associated with the business, we suggest investors to book profits and give a ‘Sell’ rating on the stock at the closing price of $221.98, down by ~0.78% as on June 16, 2021.

LHX Daily Technical Chart, Data Source: REFINITIV

Cloudflare, Inc.

NET Details

Q1FY21 Performance Update: Cloudflare, Inc. (NYSE: NET) offers products and solutions which protect and accelerate internet applications online, without the addition of hardware, software or any changes in line of code. The market capitalization of the company as on 16 June 2021, stood at ~$29.43 billion. During Q1FY21, the company posted robust performance with an increase of ~51% in revenues to $138.1 million, compared to the previous corresponding period. It also witnessed decent customer growth during the period with addition of ~120 large customers. Revenue contribution from large customers stands at over 50% of total sales. GAAP loss from operations stood at $31.3 million. It ended the period with cash and equivalents of $1,035.2 million as of 31 March 2021.

Steady Increase in Gross PPE (Source: Analysis by Kalkine Group)

Key Risks: Large customers form a significant part of the revenue base of the company, and any material impact in their relationship might have an impact on the top-line of the company.

Outlook: The company expects its revenue to be in the range of $145.5 to $146.5 million in Q2FY21 and loss from operations to be ~$10 to $9 million. It anticipates full FY21 revenues to be between $612 to $616 million and loss from operations at $28 to $24 million.

Stock Recommendation: The company has recently announced that it will open its first office in Canada at Toronto and support its growing customer base in the region. The stock of NET is trading close to its 52-weeks’ high levels of $97.33. The stock of NET gave a positive return of ~199.39% in the past one year and a positive return of ~163.95% in the past nine months. On a technical analysis front, the stock of NET has a support level of ~$80.39 and a resistance level of ~$97.44. On a TTM basis, the stock of NET is trading at a P/B multiple of 36.1x, higher than the industry average (Software & IT Services) of 8.6x. Considering the current high trading levels and valuation on a TTM basis, recent rally in the stock price, loss from operations and the key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the closing price of $94.76, up by ~1.46% as on June 16, 2021.

NET Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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