Trump's CEO Salary Cap Order Tightens Screws on L3Harris Amid Valuation Concerns

What happened

President Trump has ordered future defense contracts to cap CEO base salaries if contractors fail to perform, as reported by Barron's, targeting high compensation in the sector. L3Harris, a U.S. defense prime with 75% revenue from government contracts, is already under the microscope for its elevated valuation and reliance on missile upcycle narratives. The DeepValue report rates it a POTENTIAL SELL, citing a 34x P/E and 20x EV/EBITDA that discount perfect execution, alongside risks like high leverage and finite LHX NeXt savings. While management incentives already emphasize performance metrics, this policy could intensify pressure to meet short-term targets, potentially skewing capital allocation away from long-term investments. If L3Harris stumbles on backlog conversion or margin expansion, the salary cap might be a minor financial hit but a significant reputational blow, adding to existing execution and budget risks.

Implication

This policy directly links executive pay to contract outcomes, potentially encouraging more conservative bidding or aggressive cost-cutting at L3Harris, which relies on durable margin gains from finite savings. With net debt to EBITDA at 3.47x and interest coverage of 3.86x, any pressure to perform could strain cash flow if savings fade or orders slow. The crowded market narrative around missile spending means even minor performance slips could trigger multiple compression, aligning with the report's bear case of $250 implied value. Investors must watch upcoming quarterly book-to-bill and margin trends, as outlined in the report's 90-day checkpoints, for early stress signals. Overall, while not altering the core thesis, this adds regulatory risk to an already precarious setup, reinforcing the need for caution and potential trimming above $360.

Thesis delta

The salary cap order does not fundamentally shift the investment thesis that L3Harris is overvalued with asymmetric downside risk from execution and budget headwinds. However, it introduces a new external pressure that could amplify management's focus on short-term performance, potentially exacerbating risks like under-investment in R&D or aggressive financial engineering. This reinforces the report's view that risk/reward skews negative, supporting a trim-above-$360 strategy and re-assessment on weakness near $260.