In the last five trading days, the defense sector kicked off the fourth-quarter earnings season with its leading player Lockheed Martin Corp. (LMT) reporting higher-than-expected earnings. This came on improved top-line growth buoyed by F-35 fighter jet demand. Though Rockwell Collins Inc.’s (COL) fiscal first quarter 2015 earnings missed the Street expectations, it improved on a year-over-year basis.
Apart from the earnings bell, defense contactors were also keen on consolidating or re-aligning their businesses. Huntington Ingalls Industries, Inc. (HII) formed of a new company – SN3 − a full-service nuclear operations and environmental services provider. Raytheon Co. (RTN) and L-3 Communications Holdings Inc. (LLL) took over Sensintel and MITEQ, Inc., respectively. These moves were aimed at improving competitiveness and operational efficiency to outwit sequestration hazards.
The share price movement, however, reflected little of these developments with most of the major players gaining only slightly while others ending in the red ahead of the earnings announcements.
(Read Defense Stock Roundup for Jan 20, 2015 for a recap.)
Iraq Update
Apart from continuous airstrikes against Islamic State or IS forces in Iraq and Syria, President Obama called on Congress to authorize the use of military force against the Islamic State of Iraq and the Levant.
The U.S. currently has about 2,300 troops in Iraq, but they are mainly there for providing security and counsel to the Iraqi government.
Meanwhile, Sen. John McCain, the new chairman of the Senate Armed Services Committee, has called for more U.S. ground troops in the ongoing fight against the Islamic State of Iraq and Syria, or ISIS.
Recap of the Week’s Most Important Stories
1. The Pentagon’s prime contractor, Lockheed Martin, posted fourth-quarter 2014 adjusted earnings of $3.01 per share, comfortably surpassing the Zacks Consensus Estimate of $2.81 by 7.1%. Earnings in the reported quarter also rose 26.5% from $2.38 per share in the year-ago quarter, led by strong operational performance and higher fighter jet demand.
Despite the tepid defense budget scenario, the company’s quarterly total revenue of $12.5 billion increased 8.6% from $11.5 billion a year ago. All segments, except Information Systems & Global Solutions, recorded year-over-year sales increase. The top line also surpassed the Street consensus by 5.5%.
However, the defense contractor issued a weaker-than-expected 2015 profit forecast. The company expects 2015 revenues to decline 4.6% year on year, a sharp drop from the low single-digit decline the company forecast in Oct 2014 (read: Lockheed Martin Q4 Earnings, Revenues Beat Estimates).
2. Rockwell Collins Inc. reported results for first-quarter fiscal 2015 ending Dec 31, 2014. Its adjusted first-quarter earnings per share of $1.10 missed the Zacks Consensus Estimate by 1.8%. Earnings, however, improved 14.6% year over year.
Rockwell Collins’ total sales were $1,226 million in the quarter, beating the consensus estimate of $1,217 million by 0.74%. The top line also increased 16.3% year over year, primarily on higher sales at Information Management Services that came on the back of the ARINC acquisition (read more: Rockwell Collins Misses on Q1 Earnings, Beats on Revenues).
3. Raytheon Co. acquired Arizona-based privately held firm, Sensintel, Inc., to boost its unmanned aerial systems business. The financial terms of the transaction were not disclosed. The deal is not expected to materially impact Raytheon's sales or earnings in the first quarter or full year 2015.
Raytheon said Sensintel will now become part of its Missile Systems business. Sensintel specializes in expendable remote sensing and UAS engineering for intelligence and special operations communities. It was created in 2013 when Britain's BAE Systems sold its Unmanned Aircraft Programs. It serves the U.S. Special Operations Command, the Office of Naval Research and the U.S. Air Force Research Laboratory.
Meanwhile, the U.S. Air Force will re-evaluate proposals received in a competition for a long-range radar system initially won by Raytheon in Oct 2014, beating out rival bids from Lockheed Martin and Northrop Grumman Corp. The new radar system, known as Three-Dimensional Expeditionary Long-Range Radar (3DELRR), is a ground-based system for tracking cruise missiles and drones.
The re-evaluation stems from protests filed by Lockheed Martin and Northrop Grumman. Although the timing of the re-evaluation is uncertain, per a Reuters source, it could include a more technical assessment of the proposals submitted by the companies.
4. Huntington Ingalls Industries, Inc. announced the formation of a new company – Stoller Newport News Nuclear or SN3 − a full-service nuclear operations and environmental services provider.
This restructuring aims at integrating the expertise of S.M. Stoller Corp. and Newport News Nuclear, the two subsidiaries of Huntington Ingalls. The company believes that the move will boost the market competitiveness of these businesses.
In a sense, SN3 will be a one-stop resource for nuclear operations and environmental services capabilities for the Department of Energy and Department of Defense markets. Post restructuring, Newport News Nuclear will operate as a subsidiary of SN3 (read more: Huntington Ingalls Combines Two Companies to Create SN3).
5. L-3 Communications Holdings Inc. has been consolidating its operations lately to enhance its competitiveness and operational efficiency. L-3 Communications acquired the assets of MITEQ, Inc., a manufacturer of specialized RF microwave products and SATCOM components for space and military applications, for $41 million. The acquired business will be combined with the company’s Narda Microwave-East unit and will be named L-3 Narda-Miteq. The new entity will cater to the U.S. military and commercial customers (read more: L-3 Communications Adds MITEQ Assets to its Portfolio).
6. The Boeing Co. (BA) secured a contract to manufacture eight AH-64E Apache attack helicopters for Indonesia. This firm-fixed-price foreign military sales contract is valued at $295.9 million. The helicopters to be built in Mesa, AZ are slated for completion by Feb 2018. This deal was first flagged to the Congress in 2012 and formally announced in Aug 2013 by the then Secretary Chuck Hagel.
Performance
Overall, the performance of the defense stocks remained bearish during the last five trading sessions. Boeing and Rockwell Collins ended in the green with nominal gains. On the other hand, Lockheed Martin, General Dynamics Corp. (GD), Raytheon, Northrop Grumman, Textron Inc. and L-3 Communications Holdings ended in the red.
The picture in the past six months was more convincing with none ending in the red. Northrop Grumman is leading the way, followed by Rockwell Collins. Boeing much to investor relief gained 7.65% over the 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 |
-2.53% |
+12.09% |
|
BA |
+0.05% |
+7.65% |
|
GD |
-1.22% |
+13.88% |
|
RTN |
-1.3% |
+12.33% |
|
NOC |
-0.84% |
+19.68% |
|
COL |
+0.79% |
+14.73% |
|
TXT |
-2.57% |
+11.78% |
|
LLL |
-0.07% |
+4.08% |
What’s Next in the Defense World?
Raytheon, Northrop Grumman and L-3 Communications Holdings are slated to report their fourth quarter 2014 numbers on Jan 29 before the market opens.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment