Cramer: This Defense Stock Not Like Others

(Click for video linked to a searchable transcript of this Mad Money segment)

Defense contractors have been roaring higher, with the Street largely coming to terms with sequester, noted Jim Cramer on Tuesday's broadcast.

Well, we should say most defense contractors have rallied. Harris Corporation has been the exception to this rule - it's traded about flat for the year.

At first glance that may seem curious. Harris makes state of the art communications equipment such as tactical radio equipment. Shouldn't Harris rally along with other defense sector stocks?

Cramer thinks the underperformance is largely because Harris is not a pure play defense contractor. "Although the company supplies the military, they also have a commercial component," Cramer explained.

Because the government and commercial markets have very different requirements and purchasing protocols, Cramer doesn't think the stock will rally significantly until management takes aggressive action.

"I think Harris Corporation needs to break itself up," he said.

Adek Berry | AFP | Getty Images

"If Harris were to split itself into two companies, one a pure play defense contractor, and the other a purely commercial business, I think those two stocks could both generate a lot of interest on Wall Street," he added.

That is, the government business could become popular with investors seeking relative safety and yield. "It has slow predictable growth and throws off a ton of cash," Cramer said.

Conversely the corporate side could attract growth investors. "It's growing more quickly," Cramer said, but that growth is obscured under the company's current structure.

"You split them up, you could have a government defense stock with a higher yield, and a faster-growing commercial communications stock with a higher price to earnings multiple."

Cramer's crunched the numbers and he likes the potential.

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"If Harris were to spin-off its commercial component, I think it would shoot higher just like Motorola Solutions," Cramer said, the communications arm of the old Motorola.

"In fact, simply on the announcement of a breakup, I think Harris could quickly trade up to the same valuation as Motorola, which sells for 13.8 times next year's earnings estimates. You give Harris the same multiple, and this becomes a $63.90 stock—that's a 27% gain from where it's trading right now," he said.

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