Approximately 90% of defense companies have already released their Q2 earnings numbers. Last week, Northrop Grumman NOC and General Dynamics GD reported better-than-expected quarterly results with both companies lifting their full-year profit outlook. Shares of the two defense operators also hit 52-week highs on Jul 29 borne aloft on the strength of their aerospace units.
In the not-so-good corner, L-3 Communications delivered weak quarterly results as contract cost mounted at the Platform Integration division of its Aerospace business wing.
Apart from the usual earnings story, Lockheed Martin’s LMT F-35B fighter received the U.S. Marine Corp.’s approval for the first F-35B squadron ready for combat.
(Read Defense Stock Roundup for Jul 28, 2015 here.)
Recap of the Week’s Most Important Stories
1. General Dynamics not only reported better-than-expected second-quarter earnings but also raised the full-year profit guidance. Company-wide operating margins expanded an impressive 100 basis points year over year leading to 20.7% profit growth. Its top line also increased 5.5% buoyed by higher contribution from the Aerospace, Information Systems and Technology and Marine Systems segments, partially offset by lower sales from Combat Systems.
On the negative side, however, higher capital spending and lower cash from operations in the second quarter led to a 35.4% slide in free cash flow to just $511 million (read more: General Dynamics Posts Upbeat Q2 Earnings, Lifts View).
2. Northrop Grumman reported forecast beating second-quarter earnings and increased the 2015 guidance for EPS and cash flow. Yet, the company registered lower revenues due to a year-over-year decline in Electronic Systems, Technical Services and Information Systems sales. Northrop nonetheless continues to witness strong demand for its products on a global scale with programs like F-35 and E-2D, Triton, and SABR radar, as well as a robust set of new programs.
The company also ended the second quarter with strong free cash flow and is adopting new tax practices that will enable it to shift taxable income to future periods (read more: Northrop Grumman Beats on Q2 Earnings, Raises 2015 View).
3. Diversified U.S. conglomerate Textron Inc. TXT reported second-quarter 2015 earnings that outpaced the Zacks Consensus Estimate by 1.7% and improved 17.6% year over year. However, the company’s top line declined 7.4% on account of lower contribution from the Bell and Textron Aviation segments. The company maintained its earnings expectation from continuing operations for 2015 (read more: Textron Tops Q2 Earnings, Misses Revenues; Guidance Intact).
4. L-3 Communications Holdings Inc. posted second-quarter 2015 earnings that lagged the Zacks Consensus Estimate by 18% and came in lower than the year-ago figure by 8%. The bottom line was affected by charges in the Platform Integration division of its Aerospace Systems segment, as well as continuing headwinds from U.S. defense budget constraints. The company also reduced its earnings expectation for the year (read more: L-3 Communications Misses Q2 Earnings, Cuts Profit View).
5. Boeing Co. BA Chairman Jim McNerney suggested moving some key operations abroad if the Congress doesn’t reauthorize the Export-Import (Ex-Im) Bank. While addressing the Economic Club of Washington, D.C. last week, he further stressed that the company will begin to rethink its strategy of carrying out all its manufacturing in the U.S. to pursue export credits overseas. The company is already struggling to deliver higher revenues from the Boeing Defense, Space & Security division (read more: Boeing to Shift Operations Abroad Upon Ex-Im Closure).
6. After years of delay, U.S. Marine Corps Commandant General Joseph Dunford has declared that an initial squadron of 10 Lockheed Martin F-35B fighter jets is ready for combat. This is indeed a milestone for Pentagon's largest weapons program. With this decision, the U.S. Marines became the first U.S. military service to declare an "initial operational capability" for the F-35 fighter.
Performance
In the last five trading days, all the major defense companies have traded in the green barring L-3 Communications, who lost approximately 6%. Northrop gained the most with 5.4% share price appreciation.
The six-month picture is rather mixed with major companies witnessing share price appreciation. However, Boeing, Rockwell Collins, Textron and L-3 Communications are moving in the red category.
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 |
2.04% |
9.88% |
|
BA |
1.33% |
-1.24% |
|
GD |
3.16% |
8.20% |
|
RTN |
3.82% |
3.71% |
|
NOC |
5.40% |
8.27% |
|
COL |
0.55% |
-1.43% |
|
TXT |
0.86% |
-0.23% |
|
LLL |
-5.90% |
-8.91% |
What’s Next in the Defense World?
Huntington Ingalls Industries, Inc. HII will report its second-quarter 2015 results on Aug 6, 2015 before the opening bell.
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