Over the last five trading sessions, Q3 earnings releases of the major defense companies grabbed most of the limelight. Shares of the top defense contractors experienced a boost as third-quarter results showed continued growth in earnings and operating margins. Although the defense contractors witnessed lower revenues in the quarter due to a slowdown in federal spending, the picture was overall reassuring, particularly on the guidance front.
(Read Defense Stock Roundup for Oct 21, 2014 for a recap.)
Iraq Update
Tensions escalated in Iraq over the weekend as the U.S. and its allies conducted as many as 22 airstrikes against Islamic State (IS) forces in Iraq and one in Syria over Friday and Saturday. This marked the most intense action for a 24-hour stretch since the Pentagon started airstrikes against the militant group in August. The U.S. military forces carried out airstrikes near the Mosul dam, the city of Fallujah and the northern city of Bayji.
The U.S. Central Command has picked a name for its continued engagement against the Islamic State as “Inherent Resolve.” The name suggests the U.S administration and its partner nations’ resolve and commitment to eliminate the terrorist forces in Iraq and Syria. This could only mean good news for the defense and aerospace industries, which have already cashed in on the lingering crisis.
Recap of the Week’s Most Important Stories
1. Pentagon’s No. 1 weapon supplier, Lockheed Martin Corp. (LMT), posted forecast-beating earnings in spite of lower-than-expected revenues in the third quarter. The company’s shares were trading almost 2% higher at $176.01 on Oct 22 after falling as much as 5% the previous day following the release. Lockheed Martin revised its 2014 revenue and earnings guidance to the higher end of its previous projections. However, Lockheed expects 2015 revenues to decrease by a low single-digit percentage range over 2014 (read more: Lockheed Martin Pulls Off Q3 Earnings Beat, Revenues Dip).
Lockheed Martin has nabbed a $4 billion contract from the Pentagon to develop the eighth batch comprising 43 units of F-35 fighter jets for the U.S. military and its allies, including Britain (read more: Lockheed Martin (LMT) Wins $4B F-35 Fighter Jet Contract).
The company also secured a $486.5 million modification contract from the U.S. Air Force. The modification provides the company with the right to exercise an option year to provide services related to F-22 sustainment activities.
2. The Boeing Co. (BA) delivered a nearly 19% jump in third-quarter profit, backed by robust commercial deliveries and improved profitability in its defense sector. The company also raised its full-year earnings forecast (read more: Boeing (BA) Beats on Q3 Earnings, Guidance Lifted Yet Again).
3. General Dynamics Corp. (GD) reported higher third-quarter earnings, backed by improved operating margins. It also raised its 2014 earnings forecast by 25 cents a share on the expectation of a modest increase in revenue, higher operating earnings in three of the company's four divisions and on a lower tax rate (read more: General Dynamics (GD) Sweeps Past Q3 Earnings Estimates).
4. Northrop Grumman Corp. (NOC) reported higher-than-expected third-quarter earnings and increased its earnings outlook despite a drop in revenues. Northrop’s Aerospace unit was the only one to deliver higher sales in the quarter (read more: Northrop Grumman Beats Q3 Earnings & Revenue Estimates).
5. The world’s largest missile maker Raytheon Co. (RTN) reported weak third-quarter results with earnings missing the Street expectation by 2.5%. Earnings also decreased 1.9% year over year mainly due to lower revenue generation. Yet, the company experienced robust demand for its products, particularly from foreign customers and raised its 2014 outlook (read more: Raytheon Earnings Disappoint on Lower Revenues, View Up).
Performance
In the past five trading days, all the major defense companies traded in the green except Boeing. General Dynamics gained the most with 7.4%, followed by L-3 Communications Holdings Inc. (LLL).
In the past six months, the market reaction has been more or less optimistic. All the major defense companies have traded in the green barring Boeing and Textron Inc. (TXT).
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 |
+6.0% |
+13.4% |
|
BA |
-3.9% |
-3.9% |
|
GD |
+7.4% |
+23.9% |
|
RTN |
+1.3% |
+4.1% |
|
NOC |
+3.7% |
+9.8% |
|
COL |
+2.7% |
+4.6% |
|
TXT |
+3.6% |
-0.9% |
|
LLL |
+4.6% |
+0.5% |
What’s Next in the Defense World?
L-3 Communications Holdings and Alliant Techsystems Inc. are slated to report their third quarter results on Oct 30. Rockwell Collins Inc. will report its quarterly results on Oct 31.
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