Among the pressing needs of the defense landscape, Intelligence Surveillance and Reconnaissance or ISR zone and cyber security are the most compelling. Sensing the need of the hour, the Pentagon is keen on investing in future weapon systems and other technologies, keeping the ambitious defense companies on their toes.
Raytheon RTN, for instance, teamed up with Estonia for a long-term collaboration in cyber security in spite of having scooped up a number of other contracts. Northrop Grumman NOC enhanced its focus on airborne and space ISR business by realigning its division.
On the earnings corner, AAR Corp. AIR incurred losses in its third quarter of fiscal 2015 due to major impairment charges related to the precision systems manufacturing business that it plans to sell. Adjusted quarterly earnings, however, came in above the Street expectations.
(Read Defense Stock Roundup for Mar 24, 2015 here.)
Recap of the Week’s Most Important Stories
1. Raytheon Company and the Estonian Ministry of Defense have agreed to explore a long-term collaboration in the area of cyber security. With expertise in integrated defense systems and state-of-the-art cyber security solutions, Raytheon will be now able to offer new solutions for national security. However, details of the collaboration will be defined in an upcoming meeting between the representatives from Estonia's Ministry of Defense and Raytheon in Tallinn.
Apart from the cyber security, the world’s largest missile maker – Raytheon − secured a few other big defense deals. The first was a $769.4 million direct commercial sale contract to upgrade a number of Patriot Air and Missile Defense Systems for the Republic of Korea. Patriot is a long-range, high-altitude, all-weather system developed to counter threats from tactical ballistic missiles, cruise missiles and advanced fighter aircraft. Raytheon will deliver three upgrades to Korea’s current Patriot system that includes open architecture, a modern man station interface and radar digital processors.
The defense major also nabbed a $700 million service and product contract for several U.S. missile defense facilities. The contract entails offering of sustainment services and products supporting the Integrated Tactical Warning/Attack Assessment (“ITW/AA”) and Space Support Contract covered systems. The ITW/AA is the worldwide missile warning and surveillance system with air, land and space-based systems. The program is expected to be completed by 2020.
The company also won a fixed-price incentive firm modification contract worth $528.8 million, under which it can exercise an option to supply Advanced Medium Range Air to Air Missile (“AMRAAM”) to the Air Force (read more: Raytheon Co. Wins $528.8M AMRAAM Modification Contract).
2. Northrop Grumman Corp. announced a restructuring to focus on its space and airborne Intelligence, Surveillance, Reconnaissance (“ISR”) business. The defense giant split its ISR&TS division into two new entities: Airborne Intelligence, Surveillance Reconnaissance and Targeting Systems, and Space Intelligence, Surveillance & Reconnaissance Systems. Northrop Grumman’s efforts in addressing the rise in cyber crime – with deep focus on ISR systems – is in sync with the defense industry’s increasing emphasis on developing high-tech intelligence equipment.
3. Lockheed Martin Corp. LMT received a contract worth $485 million from the U.S. Air Force. Per the contract, Lockheed’s Missiles and Fire Control segment will supply the Sniper advanced targeting pods to the Air Force, along with initial spares and two-way data links. The contract also includes foreign military sales. Sniper is a targeting system that is extensively used by the U.S. Air Force for long-range target detection and surveillance (read more: Lockheed Martin Receives $485M Air Force Contract).
4. Huntington Ingalls Industries’ HII Ingalls Shipbuilding unit clinched a $604.3 million contract modification for the construction of the Arleigh Burke-class (DDG 51) Aegis guided missile destroyer DDG 121 for the U.S. Navy. The ship is the third of the five DDG 51 destroyers that the company was awarded in Jun 2013.
This contract will enable the shipyard to buy bulk materials and move workers from ship to ship. It will also allow Ingalls to build destroyers for the next decade.
5. AAR Corp. incurred a loss in its third quarter of fiscal 2015 as the aerospace and defense company’s sales declined more than expected. The company also recorded a major write-down related to the unprofitable precision systems manufacturing business that it intends to sell.
The company digested a loss of 89 cents. Revenues for the quarter came in at $380.1 million versus the consensus estimate of $507.8 million. Excluding the charges, the company reported estimate-beating quarterly earnings of 94 cents compared with 40 cents per share earned a year-ago.
Performance
Barring Raytheon, Textron TXT and L-3 Communications Holdings defense stocks generally showed a bullish trend during the last five trading sessions. Rockwell Collins gained the most, followed by General Dynamics GD. In the past six months, the picture was somewhat idealistic as none of the defense majors closed in the red. Textron secured the top spot, followed by Rockwell Collins.
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 |
+0.78% |
+12.10% |
|
BA |
+0.69% |
+19.88% |
|
GD |
+1.71% |
+8.20% |
|
RTN |
-0.45% |
+9.22% |
|
NOC |
+0.36% |
+23.47% |
|
COL |
+1.79% |
+23.55% |
|
TXT |
-0.02% |
+25.23% |
|
LLL |
-0.39% |
+6.53% |
What’s Next in the Defense World?
In the next five days, no major developments are expected on the defense front. Unless something untoward happens in the global markets, we believe that defense stocks will keep the trend.
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