Harris Stratex belongs to a bigger, better company called Harris. HSTX is a result of the merger of Harris’ microwave communications division, which makes radios for wireless networks, with Stratex Networks. The deal was great for Harris, but not necessarily so for investors in HSTX.
Harris got to consolidate its smallest, least profitable division with its competitor to create the largest company in the microwave communications space. This allowed the company to take microwave off its income statement, which Cramer likes, while retaining control over the division. Harris owns all the class B shares, which gives them the power to appoint five of nine directors. Harris Stratex is a great example of a terrible practice: stock market feudalism. In this company, third estate only gets four board seats, and since you are the third estate, that’s no good, Cramer says.
But Harris, the parent, is another story entirely. Getting microwave out of the way allows the company to focus on its other businesses, which are stronger. The government communications division just won a five-year, $600 million contract for supplying 500,000 handheld devices for imputing census data.
The radio frequency division is the most profitable, though. Harris owns 33% of the global market share in tactical radios, up from 27%. The addressable market for its gear is about $3 billion, but new products could take that up to $6 billion, so the growth in this division is far from finished, Cramer says.
The other division is broadcast. It’s a big play on the transition of TV stations from analog to digital signals, which makes it a play on the increased penetration of HDTV. The transmitter segment here hasn’t been performing that well because customers have put off the purchase of digital transmitters, even though they’ll eventually be necessary to meet the Federal Communication Commission’s February 2009 deadline for providing digital broadcasting. Past underperformance means future outperformance for transmitters because it’s the law. The addressable market for its broadcast division gas grown from $1 billion three years ago to $5.5 billion now.
Bottom Line: Cramer would sell HSTX, but buy its parent, HRS, for its three other, better children.
Questions? Comments? firstname.lastname@example.org