The defense sector recovered over the last five trading sessions from the earlier lows. Notably, major aerospace and defense company The Boeing Co. (BA) saw its fortunes rise over the past week on record 2014 deliveries once again.
A Raytheon Co. (RTN) and General Dynamics Corp. (GD) joint venture won a $1.5 billion contract from the U.S. Air Force. Lockheed Martin Corp. (LMT) grabbed a U.S. Army contract to upgrade the Army Tactical Missile System.
Even though the defense primes are smarting under budget austerity, the year began with media sources citing that the Pentagon will request about 20% less in war funding as President Obama is slated to release his fiscal 2016 federal budget proposal on Feb 2.
(Read Defense Stock Roundup for Jan 6, 2015 for a recap.)
Iraq Update
Between Jan 6 and 12, 2015, the U.S. military has conducted over 97 airstrikes against Islamic State forces in Iraq and Syria. While 54 of these strikes were made in Syria, 43 of them were in Iraqi territory, all using fighter, bomber and piloted aircraft.
Though the U.S. military troops have started training Iraqi military forces at two bases in Anbar and Taji in Iraq to combat the offensive against the Islamic State in Iraq and Syria militants, Iran's hold on Iraq appears to grow tighter and faster every day. Last year, Iran sold its war-torn neighbor approximately $10 billion of weapons and hardware, mainly assault rifles, heavy machine guns and rocket launchers.
Recap of the Week’s Most Important Stories
1. Boeing once again reported industry record deliveries in 2014, retaining its position as the world’s biggest airplane maker. The aerospace major reported all-time high jet deliveries for 2014, beating its own projection, driven by strong commercial numbers. The heightened deliveries were also a function of an increased production rate. Its commercial deliveries in 2014 were up 11.6%, while defense deliveries increased 7.6% from the 2013 level (read more: Boeing Commercial Delivery Track Record Spotless in 2014).
2. The Raytheon and General Dynamics joint venture − Range Generation Next (“RGNext”) − won a $1.5 billion contract from the U.S. Air Force for operating and maintaining launch ranges at Florida’s Space Coast and Vandenberg Air Force Base in California. RGNext is primarily focused on providing innovative technologies and processes to the U.S. Air Force Space and Missile Systems Center’s Launch and Test Range System (“LTRS”) Integrated Support Contract (“LISC”) (read more: Raytheon-General Dynamics JV Wins Contract Worth $1.5B).
3. Lockheed Martin Corp. won a contract, worth $78 million, from the U.S. Army to upgrade the Army Tactical Missile System (“ATACMS”). The modernization will eliminate the risk of unexploded sub-munitions following destruction of a target. The ATACMS is the U.S. Army's only tactical long-range precision strike surface-to-surface weapon that has demonstrated high rates of accuracy and reliability (read more: Lockheed Martin to Upgrade U.S. Army's ATACMS for $78M).
4. A Lockheed Martin and Sikorsky joint venture company − The Maritime Helicopter Support Co. – is nearing an agreement with the U.S. Navy on a follow-on contract to support the fleet of MH-60 Seahawk helicopters for the next six years, as per media reports. In May 2014, the joint venture company had won a $1.2 billion contract to build the first six of 21 new presidential helicopters.
Overall, the program is expected to be worth $3 billion. Importantly, the $1 trillion bill, signed in Dec 2014, includes $368 million for the Presidential Helicopter Replacement Program and $100 million for the Combat Rescue Helicopter Program.
5. As per media reports, the Pentagon is expected to request approximately $51 billion for fiscal 2016 starting Oct 1 for the Overseas Contingency Operations (“OCO”) funding, which is essentially government-speak for foreign wars and war on terror operations. This is 20% less than the $64 billion approved by the Congress for this fiscal and the lowest since the 2001 terrorist attacks. In addition, basic defense spending request is expected to be about $534 billion when the President proposes the FY 2016 federal budget next month.
Performance
Overall, the performance of defense stocks has remained bullish during the last five trading sessions. All the big defense stocks have closed in the green. The biggest gainer was Northrop Grumman Corp. (NOC), followed by Lockheed Martin. Notably, Boeing gained 2.62% over the past five trading days.
The past six-month picture also remained green. All the major defense companies reported gains. Lockheed Martin, Northrop Grumman, General Dynamics and Raytheon registered double-digit share price growth, with Northrop Grumman leading the way. Boeing gained 1.04% over the time frame reversing its losing spree.
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 |
+3.22% |
+20.18% |
|
BA |
+2.62% |
+1.04% |
|
GD |
+1.61% |
+18.19% |
|
RTN |
+0.39% |
+13.51% |
|
NOC |
+5.42% |
+24.22% |
|
COL |
+0.45% |
+6.37% |
|
TXT |
+2.33% |
+9.28% |
|
LLL |
+2.56% |
+5.13% |
What’s Next in the Defense World?
While sequestration is still holding off the defense sector, the Republican win in the mid-term election, Middle East tensions, the Obama administration’s major realignment along with a rising U.S. economy may turn out to be blessings for this sector in 2015. However, the likely lower OCO funding may counter this optimism.
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