Shares of all big defense contractors recovered across the board over the last five trading sessions from a poor showing in the prior week, thanks to a flow of Foreign Military Sales (“FMS”) contracts.
Among the most important headlines, Raytheon Co. (RTN) nabbed a big FMS deal to supply 10 Patriot missile defense systems to Qatar. Northrop Grumman Corp. (NOC) also won a significant FMS contract to supply RQ-4 Global Hawk drones to South Korea.
L-3 Communications Holdings Inc. (LLL) revealed plans of divesting its Marine Systems International (L-3 MSI) business.
(Read Defense Stock Roundup for Dec 16, 2014 for a recap.)
Iraq Update
As the U.S.-led campaign against the Sunni militant group the Islamic State in Iraq and Syria (ISIS) grinds on, the U.S. military has conducted 15 airstrikes against Islamic State forces in Iraq and Syria as reported on Dec 19, 2014. As part of its proclaimed Inherent Resolve strategy, the U.S. military has conducted airstrikes, comprising 4 in Syria and 11 in Iraq, using fighters, bombers and remotely piloted aircraft.
Recap of the Week’s Most Important Stories
1. Raytheon Co. won a contract valued at $2.4 billion to supply 10 Patriot missile defense systems to Qatar. This FMS contract includes spare parts and is due to be completed by Apr 30, 2019. Upon completion, Qatar will be the fourth of the six Gulf countries to have the missile defense system following Saudi Arabia, the UAE and Kuwait.
Apart from this deal, Raytheon also clinched a $344.3 million FMS contract from the U.S. Air Force for rendering support services for the Command and Control Switching System in Canada (read more: Raytheon in $344M-FMS Deal for Logistics Support to Canada).
2. Northrop Grumman Corporation received an FMS contract from the U.S. Air Force worth $657.4 million to supply RQ-4 Global Hawk drones to South Korea (read more: Northrop Grumman Wins $657.4M Global Hawk FMS Contract).
3. General Dynamics Corp. (GD) nabbed a modification contract valued at $498 million from the U.S. Navy to build a fourth amphibious assault ship that will serve as a floating base for military operations. The contract runs through Mar 2018 and will be performed by General Dynamics' National Steel and Shipbuilding Co (“NASSCO”) unit on a fourth Mobile Landing Platform Afloat Forward Staging Base for the Navy.
4. Lockheed Martin Corp. (LMT) received a $308.3 million FMS deal from the U.S. Air Force to provide the Taiwan government with 144 Active Electronically Scanned Array radars (read more: Lockheed Martin Secures $308M Foreign Military Sales Deal).
Meanwhile, the defense prime has agreed to settle a $1.3 billion lawsuit over 401(k) funds on the eve of a trial. Lockheed was accused of shortchanging roughly 120,000 retirees and employees who participate in the company’s 401(k) retirement plans. Workers accused the company of subjecting them to excessive fees while leaving those who invested in its stock fund with returns worse than what they would have got had they simply invested in the open market. The settlement is still subject to the judge's approval.
5. L-3 Communications Holdings Inc. has plans to divest its Marine Systems International (L-3 MSI) business to Wärtsilä Corporation. Subject to regulatory approvals and customary closing conditions, the transaction is expected to close in the second half of next year (read more: L-3 Communications to Sell Marine Systems International).
Performance
All the big defense stocks have closed in the green over the last five days. The biggest gainer was Textron Inc. (TXT), followed by Northrop Grumman.
In the past six months, the picture remained somewhat mixed. All the major defense companies have reported gains except The Boeing Co. (BA). Northrop Grumman, General Dynamics, Lockheed Martin and Raytheon registered double-digit share price growth, with Northrop Grumman leading the way. Boeing’s 4.44% decline stood out like a sore thumb.
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 |
+4.69% |
+16.6% |
|
BA |
+3.4% |
-4.44% |
|
GD |
+3.11% |
+16.96% |
|
RTN |
+3.4% |
+10.39% |
|
NOC |
+5.64% |
+21.43% |
|
COL |
+4.4% |
+5.62% |
|
TXT |
+7.66% |
+7.53% |
|
LLL |
+3.83% |
+1.33% |
What’s Next in the Defense World?
Rising geopolitical tensions along with rapid economic growth in emerging markets have pushed up demand for U.S. weapons exports to an all-time high, eventually benefiting the U.S. defense manufacturers.
We remind investors that the Zacks Industry Rank for aerospace/defense is within the middle one-third of the list of 260-plus industries, putting it in the neutral zone. Despite the uncertainty related to sequestration, the prospects are still very much in place keeping in mind the ongoing recovery in the U.S. economy and the Iraqi civil war (to know more, please see: Zacks Industry Rank).
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