It was an eventful week for the defense sector, with newly formed company Orbital ATK Inc. OA reporting its first financial numbers. Elon Musk’s SpaceX Falcon 9 rocket won the U.S. Air Force certification thereby breaking the monopoly United Launch Alliance or ULA have had for years.
L-3 Communications Holdings Inc. LLL continues to expand and strengthen its existing portfolio through acquisitions and divestitures. Raytheon Company RTN launched a maritime navigation systems subsidiary in San Diego, CA, thereby expanding its maritime navigation systems across the country.
(Read Defense Stock Roundup for May 26, 2015 here.)
Recap of the Week’s Most Important Stories
1. Orbital ATK Inc. reported its first financial results with its fourth-quarter fiscal 2015 earnings. The company’s quarterly earnings surpassed the Street consensus by 3.6% and increased 70.1% from the year-ago period. The upswing in earnings came on higher operating income in all the three segments. However, its top line lagged the Street expectation by 3.3% and declined by the same margin from the year-ago figure (read more: Orbital ATK Debuts with Earnings Beat, Revenues Miss).
2. Elon Musk’s SpaceX Falcon 9 rocket won the U.S. Air Force certification for the nation's most critical launch missions. The U.S. Air Force will release a request in Jun 2015 for proposal for an upcoming satellite launch and here lies its first opportunity.
The certification of SpaceX to compete for defense space launch contracts is good for competition. The company will directly be competing for Pentagon satellite launches against ULA, a joint venture of Boeing BA and Lockheed Martin Corp. LMT, breaking the monopoly the two have had since 2006.
For a long time ULA was the sole rocket launch provider for most of the U.S. military and spy satellites. Moreover, SpaceX is set to deliver its own heavy-lift rocket to compete with ULA's Atlas 5 later this year. Meanwhile, ULA stated that it would go out of business unless it won commercial and civil satellite launch orders to offset the expected slump in U.S. military and spy launches. The company is trimming its top brass by 30% to brace against ScpaceX rocket launch competition.
3. L-3 Communications Holdings Inc. acquired UK-based CTC Aviation Group in a deal worth $220 million in cash. This addition aimed at enhancing its commercial aviation training operations and strengthening its international presence. Its integration into L-3’s Commercial Aviation Training business, which already includes L-3 Link UK, a world-class provider of flight-training simulation devices, will strengthen L-3 Communications’ foothold as a leading provider of flight training and simulation services (read more: L-3 Communications Acquires UK-based CTC Aviation Group).
In a separate business development, L-3 Communications wrapped up its proposed sale of Marine Systems International (“L-3 MSI”) to Wartsila Corporation for approximately $318 million (before selling and other transaction expenses). The MSI divesture is expected to improve margins on a consolidated basis (read more: L-3 Communications Sells Marine Systems Unit to Wartsila).
4. Raytheon Company has launched a maritime navigation systems subsidiary − Raytheon Anschuetz USA LLC − in San Diego, CA. Raytheon Anschuetz will fortify its maritime navigation systems across the country. The Raytheon Anschütz services network covers U.S. coastlines and more than 50 service points (read more: Raytheon Anschuetz Unit Launched to Fortify U.S. Maritime).
In a separate development, Raytheon won a $149.5 million modification contract from the U.S. Navy for Standard Missile-2 (SM-2) and Standard Missile-6 (SM-6) fiscal 2015-2016 full rate production. The modification will include requirements for one base production year (fiscal 2015) and one option year (fiscal 2016). In both years, the contract covers SM-6 Block I and Block IA all up rounds, instrumentation kits, SM-2 and SM-6 section level and component spares, containers, and design agent engineering services.
This contract modification, which is expected to run through Mar 2018, will likely bring the total value of the award to $562.4 million if all options are exercised.
5. Northrop Grumman Corp. NOC) won a large Department of Defense contract. The company’s Technical Services segment won a U.S. Air Force contract for spares, repairs and engineering services. Expected to be completed by May 30, 2020, the contract work will be performed at Linthicum Heights and Baltimore, MD; Warner Robins, GA; and Rolling Meadows, IL. Foreign military sales are currently not a part of the contract; however, they may be included in the near future (read more: Northrop Grumman Clinches $401 Million Air Force Contract).
Performance
The past five trading sessions for the defense sector seem to have elicited mixed reactions from investors. Although Lockheed Martin, General Dynamics Corp. GD, Northrop Grumman and L-3 Communications Holdings have been the gainers, Boeing, Raytheon, Rockwell Collins and Textron have lost their mark.
The picture in the past six-month period is also mixed. Rockwell Collins and Northrop Grumman have been able to register double-digit gains with the former leading the march. However, General Dynamics and Raytheon failed to end in the green and so was L-3 Communications Holdings. Lockheed Martin, Boeing and Textron registered single-digit share price appreciation.
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 |
1.08% |
1.52% |
|
BA |
-1.09% |
8.04% |
|
GD |
1.64% |
-1.50% |
|
RTN |
-1.90% |
-1.46% |
|
NOC |
1.44% |
16.33% |
|
COL |
-1.75% |
12.69% |
|
TXT |
-1.20% |
6.26% |
|
LLL |
0.16% |
-3.83% |
What’s Next in the Defense World?
Northrop Grumman and Rockwell Collins will participate in the Deutsche Bank Industrials & Basic Materials Conference on Jun 4, 2015.
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