Defense spending has surged around the world this year, thanks to spreading conflict such as the Mideast wars. But that dynamic hasn’t created outsized gains for defense stocks.
The S&P Aerospace & Defense stock Index has climbed 9.3% year to date, trailing the S&P 500 index at 11%. L3Harris Technologies (NYSE: LHX) has particularly suffered, with the stock falling 8.7%. But there are plenty of solid defense companies. And L3Harris, the No. 6 U.S. defense contractor by revenue, is one of them.
The company was formed in 2019 through the merger of decentralized L3 Technologies, which made sensors, and Harris, a more centralized sensor and radio manufacturer. The idea was that a bigger company would quickly produce cost reductions and ultimately produce more revenue, as Morningstar analyst Nicolas Owens wrote in a commentary.
Then in 2023, L3Harris bought Viasat’s tactical data link business for about $2 billion. And later that year it spent $4.7 billion to get Aerojet Rocketdyne, which made rocket engines and more. All this helped L3Harris become a well-rounded defense contractor, going beyond its radio- and communications-centric base, Owens noted.
L3Harris produces drones, sensors, avionics, space-based systems, missile hardware, and solid rocket motors. Also, it refits civilian aircraft for military use, offers military and commercial training services, and maintains the U.S. Federal Aviation Administration’s communication infrastructure. “L3Harris has built and acquired an enviable portfolio,” Owens said.
The company has three divisions. Space & Missions Systems accounted for 51% of revenue in the first half of the year, Communications & Spectrum Dominance, accounted for 33%, and Missile Solutions accounted for 18%. The numbers total more than 100% because L3Harris had negative Intersegment revenue.
Buoyant missile segment
Its missile business is going strong. Last week, the company announced agreements to boost output of solid-rocket motors for Patriot interceptor missiles by 200% and to boost output of propulsion systems for THAAD (Terminal High Altitude Area Defense) missiles by 300%. Revenue for L3Harris’ missile unit ascended 16% in the first half of 2026 from a year earlier.
The missile business is the company’s “key attraction,” said Vertical Research Partners analyst Rob Stallard, as cited by Barron’s. L3Harris plans to spin it off in an IPO, but has put off the move from this year to mid-2027.
Market conditions undervalue the business, and there is plenty of room for growth as the Defense Department restocks its missile supply, the company says. “We are actively negotiating more than $20 billion in new contracts, potentially tripling our backlog,” CEO Christopher Kubasik said last week in the company’s earnings call.
To be sure, L3Harris isn’t perfect, Owens notes. “Its returns on invested capital are not as strong as peers’, and we think the complexity-based intangible assets are less strong than peers.”
Strong financial performance
Still, L3Harris reported solid earnings for the second quarter. Revenue appreciated 8% from a year ago, earnings per share (EPS) gained 28%, and the operating profit margin rose 60 basis points to 11.1%. The company also raised its full-year 2026 outlook for revenue and EPS.
Owens predicts revenue will increase at a 5.8% compound annual rate through 2030, as defense spending continues to outgrow GDP amid heightened global tension. The operating margin may reach 13.5% by then, he said.
L3Harris’ operating margins are near the top of the defense contracting industry, because it develops products mainly through internal research and development, Owens said. That allows it to charge premium prices.
He sees L3Harris spending about 4% of sales on internal R&D through 2030, which is more than its competitors.
Several sectors are ripe for the company’s picking. Its four biggest organic growth opportunities are pent-up demand for rocket motors, the tactical radio replacement cycle, the weaponization of space, and international sales expansion, Owens said.
So L3Harris may fly high, just like some of its products.
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