“You are next”: A warning for the leaders of Islamic State by President Obama, who has vowed to destroy the jihadists in Iraq and Syria, may not be all good for world peace, but should act as a major tailwind to the defense stocks. Obama has ramped up his operation against ISIS and spoke about his plans to knock out the group after taking months of criticism from Americans over his handling of the terror group. Despite optimism, volatility still exists in the defense share market with major companies ending in the red last week.
This apart, the spotlight was on Lockheed Martin LMT that maintained its supremacy by securing high value contacts. Boeing BA also made investor-friendly moves with dividends and share buybacks.
(Read Defense Stock Roundup for Dec 8, 2015 here.)
Recap of the Week’s Most Important Stories
1. Lockheed Martin Corp. won a seven-year Australian contract, valued at A$1.2 billion ($867 million), to train the next generation of that country's military pilots, edging out Britain's BAE Systems Plc. The contract has options for up to 25 years, which when exercised can boost the deal value.
The contract entails the delivery of 49 Pilatus PC-21 aircraft, 7 flight simulators, a modern learning environment for students, updated courseware and other logistical support by Lockheed Martin.
Also, Lockheed Martin nabbed a major U.S. Army contract, worth $1.09 billion, to build PAC-3 missiles for the U.S. Army as well as for South Korea, Qatar and Saudi Arabia for use in Raytheon Co's RTN Patriot missile defense system.
The Pentagon's prime contractor said that the contract includes Patriot Advanced Capability-3 (PAC-3) missiles and PAC-3 Missile Segment Enhancement (MSE) missiles for the U.S. Army, as well as PAC-3 missiles for the other countries. The contract is scheduled to be completed by Jun 30, 2019.
2. L-3 Communications Holdings Inc LLL said it would sell its government services division, National Security Solutions, to smaller defense contractor CACI International Inc. for $550 million in cash. This move depicts the company’s endeavor to move away from low-margin businesses and focus on the communications and defense electronics markets.
Michael Strianese, the company’s chairman and chief executive officer, said in the press release, “L-3 is in the midst of a business transformation aimed at reshaping our portfolio, strengthening our focus on markets where we have leading positions, and improving our top-line growth and margin profile,” (read more: L-3 Communications to Shed NSS Business for $550M).
Meanwhile, the company also disclosed its 2016 outlook and lowered the earnings guidance for 2015 at its investor day. For 2016, the company expects net income of $550 million or earnings of $6.90 to $7.10 per share on revenues of $9.95 billion to $10.15 billion. For 2015, the company expects adjusted EPS of $6.55 to $6.65 per share on revenues of $10.33 billion to $10.43 billion, down from the prior guidance of $6.80 to $6.90 for EPS and $11.4 billion to $11.5 billion for revenues.
3. Raytheon Co. won a significant contract from the U.S. Missile Defense Agency (“MDA”) to deliver its signature missile interceptor. Per the contract, the missile maker will produce and deliver 17 of its Standard Missile-3 (SM-3) Block IIA interceptors to the Missile Defense Agency. This variant of the SM-3 is built with faster speed and greater range than the past iterations (read more: Raytheon Secures $543M MDA Contract for SM-3 Block IIA).
4. Boeing Co. boosted its dividend by 20% and raised its stock-repurchase plan to $14 billion from $12 billion to let investors share certain benefits of soaring airliner deliveries. Its quarterly dividend payout increased to $1.09 per share from 91 cents and is payable on Mar 4, 2016 to stockholders of record as of Feb 12, 2016. The aerospace giant said on Dec 14 that it had finished its stock repurchases for 2015, spending $6.75 billion. It expects to start buying back shares in Jan 2016.
Performance
In the last five trading days, the major defense companies showed tepid performances with companies like Lockheed Martin, Boeing and other defense majors barring Textron Inc. TXT ending in the red. L-3 Communications Holdings lost the most by nearly 4%, followed by General Dynamics Corp. GD.
In the last six months, the picture seems more reassuring with gains predominating over losses. Raytheon keeps on topping the list with nearly 26% share price appreciation followed by Northrop Grumman NOC. General Dynamics, Rockwell Collins COL and Textron were in the red territory.
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 |
-1.02% |
15.08% |
|
BA |
-1.37% |
1.40% |
|
GD |
-1.98% |
-1.05% |
|
RTN |
-0.52% |
25.88% |
|
NOC |
-0.49% |
17.22% |
|
COL |
-1.66% |
-4.26% |
|
TXT |
0.22% |
-10.15% |
|
LLL |
-3.78% |
3.68% |
What’s Next in the Defense World?
Despite numerous tailwinds propelling the defense industry as a whole, defense stocks have been experiencing volatility with gains and losses in recent months. However, continuing geo-political uncertainties, the threat of terrorist attacks coupled with Obama’s vow to strike harder will likely keep defense stocks in focus in the near future.
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