As we near the finishing line of the Q2 earnings season, the largest military shipbuilder in the U.S. Huntington Ingalls Industries, Inc. (HII) reported impressive second quarter 2014 earnings on higher revenues and lower costs.
Also making it to the headlines over the last five trading sessions was the U.S. Defense Secretary Chuck Hagel’s visit to India. Hagel called upon the two countries to jointly develop and produce arms. India incidentally is the largest importer of U.S. arms – a blessing for U.S. defense companies which are trying to survive in mature western markets under severe budget austerities.
(Read the last recap here: Defense Stock Roundup for Jul 29, 2014.)
Iraq Update
Amid much speculation, President Obama authorized U.S. air strikes in Iraq to protect American personnel and lift the siege on the Yezidis, a Kurdish-speaking ethno-religious minority group. He also ordered humanitarian measures in the form of air drops to thousands of Yezidi people stranded on the mountain top.
U.S. fighter jets and armed drones attacked targets in Iraq to try to stop the Sunni extremists advance to the Iraqi Kurdish capital of Erbil. The Boeing Co.’s (BA) F-15Es and General Dynamics Corp.’s (GD) F-16s have already conducted strikes in Iraq. The U.S. Navy’s F/A-18F Super Hornets have also been a part of the initial bombing lines against Islamist militants.
However, Obama contended that to unite the fight against the militants from the Islamic State (ISIS) group a more comprehensive Iraqi government is required and American military solution cannot solve the crisis alone.
Meanwhile, Iraq's president Fouad Massoum nominated Mr. Abadi to form a new government, ignoring the present Prime Minister Nouri al-Maliki. Although Maliki said Abadi's nomination was a "violation of the constitution," Obama praised Abadi to form a cabinet. The U.S. officials were all in favor of a new government that will reject exclusionist policies that Washington believes have stirred dissent under Prime Minister Nouri al-Maliki. The Islamic State has already seized control of vast areas of northern and western Iraq.
Recap of the Week’s Most Important Stories
1. Pentagon’s prime contractor and the world’s largest defense company, Lockheed Martin Corp. (LMT) seems to have clinched quite a few defense deals in the past one week. Amongst the important awards, Lockheed Martin won a $193.6 million modification contract for procurement of required material, equipment, and supplies to conduct the technical engineering to define, develop, integrate and test Aegis Ballistic Missile Defense 4.1 and 5.0 Capability Upgrade baselines.
Again, the company secured a $124.6-million fixed-price contract for manufacturing and delivering Terminal High Altitude Area Defense (THAAD) ground components. Lockheed also received a $116.7 million firm-fixed-price contract modification to buy long lead parts for 14 FY 2015 C-130Js.
2. Huntington Ingalls Industries reported better-than-expected second quarter 2014 earnings of $2.04 per share. The reported figure surged 82.1% year over year as revenues increased and costs edged down. At the end of the second quarter, total backlog stood at $24.2 billion, of which $14.4 billion was funded.
The company seems to be more protected than other defense contractors from budget cuts as the U.S. defense department is expanding its fleet of submarines and destroyers and introducing a new version of aircraft carriers, with emphasis on the Asian-Pacific region. During the second quarter, Huntington Ingalls in an effort to diversify its business acquired UniversalPegasus International Holdings. The latter is a provider of engineering and project management services to the domestic and international energy markets. The deal marks Huntington Ingalls’ entry into the oil and gas market.
3. Boeing won a $250 million North Atlantic Treaty Organization (NATO) contract to modernize flight decks and avionics equipment on airborne warning and control system aircraft. The company will integrate digital technology into 13 NATO Airborne Warning and Control System (AWACS) aircraft. Modifications will start in 2016 and will be completed by 2018.
4. In a separate development, India opted to boost an order for U.S. Apache helicopters made by Boeing thanks to Chuck Hagel’s India visit. Under a deal expected to be worth $1.4 billion, India now offers to add a follow-on order of 39 AH-64D Apache helicopters to the previous 22. Moreover, the two countries are in discussion regarding an Indian Air Force purchase of 15 CH-47F Chinooks under a deal valued at another $1.4 billion.
5. Erickson Air-Crane Inc. (EAC), a provider of aviation services to commercial and government customers, reported an adjusted loss of 27 cents per share, missing widely the Street expectation of earnings of 9 cents. The company had generated earnings of 4 cents per share a year ago. Even with a 17.9% year-over-year increase, revenues missed the Street expectation by 4.5%. Erickson’s Air-Crane’s business in the first half of 2014 was affected by unfavorable weather conditions and contract delays. The company’s defense operations are also under pressure across the board, leading it to trim its 2014 outlook.
Performance
Defense stocks have been soft over the past week. The biggest loser, Lockheed Martin, dropped 0.72% over the time frame, while L-3 Communications (LLL) also traded in the red.
However, in the past six months, the market reaction has been mostly mixed. A few defense companies like Lockheed Martin, General Dynamics Corp., Northrop Grumman Corp. (NOC) and Textron Inc. (TXT) have traded in the green. Meanwhile some important defense names like Boeing, Raytheon Company (RTN), Rockwell Collins (COL) and L-3 Communications have seen their share prices go down. Only General Dynamics registered double-digit share price appreciation over the six-month time frame.
The following table shows the price movement of the major defense players over the past five trading days and during the last six months.
|
Company |
Last Week |
Last 6 months |
|
LMT |
-0.72% |
+4.55% |
|
BA |
+0.35% |
-5.72% |
|
GD |
+0.87% |
+13.66% |
|
RTN |
+0.46% |
-4.45% |
|
NOC |
+0.47% |
+4.59% |
|
COL |
+0.88% |
-5.05% |
|
TXT |
+4.74% |
+2.63% |
|
LLL |
-0.03% |
-7.96% |
What’s Next in the Defense World?
On Aug 14, 2014, The Boeing Company will attend Jefferies Global Industrials Conference.
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