L3Harris (LHX): A Beat, A Raise, A Record $42B Backlog — and the Stock Fell 11%

L3Harris Technologies, Inc. (LHX) Q2 2026 — Q2 2026 = the three months ended 3 July 2026, reported AFTER the close on 29 July. Revenue $5,881M vs $5,426M (+8.4%); GAAP diluted EPS $3.13 vs $2.44 (+28%) vs ~$2.80 consensus. Orders $7.3B, book-to-bill 1.2x, record $42B backlog, guidance RAISED. Then management delayed the missile-business IPO to 2027 — and the stock fell 8.6% next session, 11% intraday to a new 52-week low, closing $277.06 on 31 July. L3Harris beat, raised guidance and posted a record backlog — and the stock fell 11%, because the missile-business IPO slipped to 2027. THE CALL: BUY (4/5, MARKED DOWN FOR A TIMING DECISION) — base-case value ~$340.0 vs ~$277.06 today. KEY METRICS: - Revenue $5,881M vs $5,426M (+8.4%), growth in ALL THREE segments: Space & Mission Systems $2,966M (+7%), Communications & Spectrum Dominance $1,943M (+4%), Missile Solutions $1,054M (+14%). Segments were REORGANISED for 2026 - EPS $3.13 vs $2.44 (+28%) is GAAP — L3Harris publishes no adjusted figure, and the year-ago number is $2.44, NOT $2.78. Operating income $654M (+15%), margin 11.1% (+60bps). FCF $771M, operating cash flow $879M, both +37% - THE MARGIN CATCH: reported segment operating income $942M / 16.0% (+10bps) includes $39M of 'segment investment income' — a line that was ZERO in Q2 2025 (Table 4). Ex that: $903M and 15.35%, DOWN from 15.9% - THE COUNTERPOINT, AND IT'S BIGGER: Q2 2025 held $92M of asset-sale gains also absent now. Clean vs clean, $903M vs $771M = +17.1% on +8.4% revenue, margin 15.35% vs 14.21% = UP 114bps. The headline UNDERSTATES the quarter - WHERE THE 28% CAME FROM: pretax rose $186M — operating income +$83M (45%), non-service FAS pension income and other +$80M (43%, $105M-$185M), interest +$23M; tax a $44M headwind. ~43% is BELOW the operating line - PROFIT MIX: SMS is ~half of revenue at a 9.8% margin and 31% of segment profit; C&SD is a third of revenue at 26.9% (+230bps) and 55% of profit. DEMAND: $7.3B orders, 1.2x book-to-bill, record $42B backlog, plus PAC-3 MSE and 4x THAAD frameworks - BALANCE SHEET (3 Jul 26): debt $10,999M less cash $1,521M = net debt $9,478M (~2.4x EBITDA); interest fell to $129M from $152M. PLUS $968M of redeemable subsidiary preferred (Department of War money) ranking AHEAD of common. Tangible book is NEGATIVE $6,654M - CASH TIMING: H1 FCF is $584M of the $3.0B guide — 80.5% unearned. But H1 2025 was $460M of ~$2.73B (16.8%), so 2026 tracks BETTER. GUIDE RAISED: revenue $23.2-23.7B, EPS $11.80-12.00 (+$0.40 both ends) absorbing a ~$0.20 divestiture hit; dividend $5.00 = 1.80% - OUR DCF (owner-earnings, 8.0%, 2.5% terminal, on guided $3.0B FCF growing 7% then 5%): PV $27,760M + terminal $46,360M = EV $74,120M, less $9,478M net debt and $968M preferred, /187.3M shares = $340. Bear $246 / bull $446; weighted $343. We publish $340 vs $277.06 = +23% - REVERSE DCF: at $277.06 equity is $51.89B and EV $62.34B — 20.8x guided FCF, 23.3x guided EPS. That price implies a ~9.0% cost of capital, or at 8.0% terminal growth of just 0.75% — below inflation — from a business with 1.8 years of contracted revenue - STREET: Buy (17 analysts, S&P Global — 11 strong buy / 1 buy / 5 hold / 0 sell), average target $369.13, median $377, range $285-$443. Susquehanna cut to $350 keeping Buy; RBC $310, UBS $312, Bernstein $405. We ALIGN on direction, more CAUTIOUS on the number What to watch: Bullish: H2 free cash flow — ~$2.42B needed for the $3.0B guide, so Q3 settles it. Bearish: an EAC charge on fixed-price munitions, a budget CR, or capex well above $600M. Add aggressively below ~$250. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.