How to Buy L3Harris: A Cheap Drone Stock With an AI Kicker

America's war with Iran entered its seventh month last week, while Russia's war on Ukraine is approaching its fifth year of conflict. And like it or not, times of global conflict highlight the need for defense stocks. It's been more than a year since I highlighted L3Harris (NYSE: LHX) as one rising star in these conflicts and especially in the effort to combat cheap, one-way attack drones based on the Iranian Shahed-136 design.

Wall Street is only just starting to notice.

Image source: L3Harris.

L3Harris and VAMPIRE

The spring of 2025 saw an encouraging development in the effort to defeat Russian drone attacks on Kyiv and other Ukrainian cities. OSINTtechnical published a video on X showing how a Ukrainian surface-to-air missile team used L3Harris' Vehicle-Agnostic Modular Palletized ISR Rocket Equipment (VAMPIRE) launcher, firing Advanced Precision Kill Weapon System (APKWS) rockets manufactured by BAE Systems (OTC: BAESY), to shoot down a Russian Shahed.

New footage of a Ukrainian laser-guided APKWS rocket slamming into a Russian Shahed-136 attack drone, sending it spiraling toward the ground.

The low-cost rocket was fired and guided in by an L3Harris Vampire SAM system. pic.twitter.com/9rKEafTz9x

-- OSINTtechnical (@Osinttechnical) April 30, 2025

And here's the real kicker: APKWS rockets cost the U.S. military about $22,000 each. Shahed drones cost closer to $50,000.

In one fell swoop, L3Harris (and BAE) had found a way to flip the economics of drone wars on their head. No longer did the U.S. need to fire off $2 million Patriot missiles to kill $50,000 Shaheds. Now it could bring them down with VAMPIRE rockets that cost half as much as their target.

Good news, bad news

So that's the good news about L3Harris. Now here's the bad:

Last month, as you may have heard, L3Harris fired its CEO, Christopher Kubasik, over alleged "conduct ... not consistent with the values of the Company." His lieutenant, Sam Mehta, immediately stepped into the CEO's role but hasn't been able to stem the bleeding so far; L3Harris stock is down 16% over the past month and 35% from its all-time high set earlier in the year.

A decline so steep and so sudden couldn't help but catch Wall Street's notice. A couple of weeks ago, The Wall Street Journal ran a piece highlighting L3Harris's apparent value, noting that the stock had underperformed defense peers by more than 20 percentage points and was trading "at less than 16 times forward free cash flow."

For the company that has apparently found the solution to defeating Iranian and Russian drones, that seems quite a cheap price. And as the Journal observed, L3Harris is also a key supplier of solid rocket motors used for more advanced interceptor missiles -- such as the $2 million Patriot itself!

How cheap is L3Harris stock?

But is it cheap enough? Valued at its $2.7 billion in trailing free cash flow (a more reliable number than forward free cash flow), I get a 16.9x price-to-free cash flow ratio for L3Harris -- significantly cheaper than the stock's 24x price-to-earnings (P/E) ratio.

Relative to analyst forecasts for 20%-plus annual earnings growth over the next five years, this suggests that L3Harris stock might be a lot cheaper than it looks based solely on a simple PEG ratio (P/E divided by growth). Even factoring in net debt of $9.5 billion and giving the stock credit for its 2% dividend yield, L3Harris stock appears attractively priced at just over 20x free cash flow.

While it's not a slam dunk, my calculations suggest L3Harris stock is priced about 10% below its fair value.

What's next for L3Harris stock?

Final point: One recent catalyst has the potential to supercharge L3Harris's drone defense business and turn this arguably "cheap" defense stock into an inarguable bargain. Last week, L3Harris licensed new artificial intelligence (AI) technology from defense tech start-up Shield AI to make its VAMPIREs work even better.

The tech in question is called Tracker Counter-Unmanned Aircraft System, or Tracker C-UAS for short, and it uses AI to scan electro-optical/infrared spectra (EO/IR) to "detect, track, and defeat unmanned aerial threats." Shield AI says it's starting to license Tracker C-UAS to other companies, but according to the defense tech website Tectonic, L3Harris is the first to take advantage of the offer.

Adding first-mover advantage to an already-popular product, I expect this development to provide a noticeable boost to VAMPIRE sales -- and potentially to L3Harris's sales growth rate, too.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends L3Harris Technologies. The Motley Fool recommends BAE Systems. The Motley Fool has a disclosure policy.