Over the last five trading sessions, the shares of the big defense contractors were rather mixed though there was no dearth of events. Lockheed Martin Corp. (LMT) grabbed most of the limelight with South Korea giving the green signal for the multi-billion dollar F-35 deal.
The company also secured big contracts from the U.S. Department of Defense (DoD) and boosted its dividend payout and share repurchase authorization. The Boeing Co. (BA) is planning to consolidate its defense business, moving most of its engineering work out of the Puget Sound region. On the other hand, AAR Corp. (AIR) missed the Zacks Consensus Estimate on both the top and bottom line in its fiscal first quarter 2015.
(Read the last recap here: Defense Stock Roundup for Sep 23, 2014.)
Iraq Update
As part of the planned expanded mission announced by President Obama lately, the U.S. military’s air strikes against the Islamic State of Iraq and the Levant (ISIL) in Syria appear to have halted advancing militants in a town west of Baghdad. The U.S. has deployed a mix of fighter planes, bomber aircraft and Raytheon Co.’s (RTN) Tomahawk Land Attack missiles.
The U.S. was joined in the Syria operation by Bahrain, Qatar, Saudi Arabia, Jordan and the United Arab Emirates. The U.S. fighter planes have conducted 74% of more than the 240 airstrikes in Iraq and Syria since Aug 8, 2014.
With the U.S. administration’s pledge to engage in a long-term and more proactive intervention in Iraq, the defense stocks might see some gains going forward.
Recap of the Week’s Most Important Stories
1. Defense prime Lockheed Martin Corp. once again proved its dominance as well as its investor friendly nature. The company increased its fourth quarter dividend by 13% and boosted its share repurchase authorization by $2 billion (read more: Lockheed Boosts Dividend & Stock Buyback, Slows Pace).
Importantly, the Republic of Korea has finally agreed to purchase 40 of Lockheed Martin’s F-35 Lightning II Joint Strike Fighter (JSF) aircraft for its F-X fighter acquisition program. This major buy will beef up the nation’s stealth capability in response to North Korea’s growing nuclear threat (read more: Lockheed Martin to Finalize $7.1B F-35 Deal with South Korea).
Apart from the promised South Korean deal, the defense behemoth grabbed quite a few contracts from the DoD funding list. Of them, the largest win included a $413.2 million modification contract from the U.S. Air Force to build seven aircraft, comprising one HC-130J "Combat King II" search-and-rescue aircraft and six MC-130J Commando II aircraft, used for special operations and rescue and recovery efforts. The procurement will be completed by Nov 30, 2015.
The company also won a $331.4 million modification contract from the DoD. The contract won by Lockheed Martin Aeronautics Co. is aimed at procuring production non-recurring items, comprising special tooling, special test equipment items and software lab upgrades in support of the F-35 Lightning II JSF aircraft for the U.S. Marine Corps, U.S. Air Force, U.S. Navy, international partners and foreign military sales.
2. Boeing also won a $499 million contract from the DoD for providing engineering logistical support services for all H-47 helicopter variants.
In a separate development, Boeing announced its plans to further consolidate its defense business to pare costs amid a declining U.S. military budget. The company will relocate the majority of its defense services and support work out of Washington state to Oklahoma City and St. Louis. This transition will take around three years affecting about 2,000 of its 5,200 defense jobs in the Puget Sound region. The move would not affect Boeing's P-8A spy plane or KC-46 aerial refueling tanker programs.
3. Aerospace and defense products and services supplier AAR Corp. missed the top and bottom line Street Consensus in its fiscal first quarter 2015 (ending Aug 31, 2014) results. The company’s quarterly earnings missed the Street estimate by 12.2%. The company also slashed its earnings as well as revenue expectation for fiscal 2015 (read more: AAR Corp Misses on Q1 Earnings & Revenues, Guides Lower).
4. General Dynamics Corp. (GD) unit Electric Boat recently received a contract worth $310.8 million from the U.S. Navy, for support of active nuclear submarines (read more: General Dynamics to Render Nuclear Submarine Support).
5. Raytheon Co. won a $251.1 million contract from the U.S. Navy to secure 231 Tomahawk Block IV tactical cruise missiles for fiscal 2014 with an option for 2015. Under the contract, Raytheon will build and deliver Tomahawk Block IV cruise missiles to the U.S. Navy and U.K. Royal Navy and will also conduct flight tests and provide life-cycle support services. The delivery of the missiles is slated to begin in 2015.
This Waltham, MA-based company’s Tomahawk cruise missile is President Obama’s weapon of choice in the latest round of U.S. military strikes in Syria against the Islamic State militant group.
Performance
In the past five trading days, the market reaction has been more or less mixed. Lockheed Martin, Boeing, Northrop Grumman Corp. (NOC) and L-3 Communications Holdings Inc. (LLL) closed in the green, while General Dynamics Corp., Raytheon, Rockwell Collins Inc. (COL) and Textron Inc. (TXT) traded in the red. The biggest gainer was L-3 Communications, followed by Lockheed Martin.
In the past six months, most of the defense companies have reported in the green, while a few like Rockwell Collins, Textron and L-3 Communications were in negative territory.
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 |
+1.48% |
+11.10% |
|
BA |
+0.60% |
+2.61% |
|
GD |
-0.30% |
+17.05% |
|
RTN |
-1.15% |
+2.13% |
|
NOC |
+0.53% |
+6.97% |
|
COL |
-0.19% |
-0.93% |
|
TXT |
-0.03% |
-7.46% |
|
LLL |
+2.86% |
-2.45% |
What’s Next in the Defense World?
We remind investors that the Zacks Industry Rank for aerospace/defense is within the top one-third of the list of 260-plus industries. Hence, the prospects of this industry are still very much in place. We, however, expect the slightly flat-to-bearish run of the defense stocks to persist in the coming days (to know more please see: Zacks Industry Rank).
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