Earnings dominated the major stories in the defense and aerospace sector over the past five trading sessions as we entered the thick of the reporting season. Among the defense biggies, Lockheed Martin Corp. LMT has not only reported impressive results but also boosted its outlook for 2016. Other companies like Textron Inc. TXT and Rockwell Collins Inc. COL have also come up with estimate-beating results.
Unlike the broader markets, the defense sector stumbled somewhat last week after a few weeks of gains. The S&P 500 Aerospace & Defense (Industry) index and Dow Jones U.S. Aerospace & Defense Index dropped 0.95% and 0.45%, respectively, in the last five trading sessions.
Nonetheless, the sector is expected to report impressive Q2 results. Total earnings are likely to be up 9.4% supported by 1.5% revenue growth.
Apart from the earnings releases, L-3 Communications Holdings Inc. LLL, Lockheed Martin and Huntington Ingalls Industries, Inc. HII picked up big defense contracts.
(Read Defense Stock Roundup for Jul 19, 2016 here.)
Recap of the Week’s Most Important Stories
1. Pentagon’s No. 1 contractor Lockheed Martin reported better-than-expected second-quarter 2016 earnings on the back of solid operational performance. A tax benefit related to the early adoption of the employee share-based payments accounting standard also added to the positives.
Earnings improved 12.9% year over year, driven by higher deliveries of F-35 fighter jets as well as increased sales from its Sikorsky helicopter unit. It even boosted its full-year outlook for EPS, revenues, operating profit and cash flow (read more: Lockheed Tops Q2 Earnings & Revenues, Boosts View).
Apart from the earnings release, Lockheed Martin’s Aeronautics division won a contract from the Naval Air Systems Command, Patuxent River, MD for the procurement of diminishing manufacturing sources electronic components. This is a modification contract valued at $241.8 million. Per this contract, Lockheed Martin will support aircraft production through Lot 15 for U.S. and international facilities for the F-35 Lightning II aircraft (read more: Lockheed Martin Wins $242M Contract for F-35 Production).
2. Diversified U.S. conglomerate Textron reported second-quarter 2016 results wherein earnings as well as revenues topped Street expectations.
Earnings were also up 10% on 8.1% revenue growth from the year-ago quarter. This was primarily driven by higher contribution from Textron Aviation, Textron Systems and Industrial. Textron’s Bell segment revenues were down 5.4% and segment profit also tumbled 19.8% to $81 million.
Textron maintained its 2016 earnings per share guidance in the range of $2.60 to $2.80. (read more: Textron Tops Q2 Earnings & Revenues, Retains View).
3. Rockwell Collins reported its third-quarter fiscal 2016 results yesterday. The company’s earnings not only surpassed the Zacks Consensus Estimate by 2.5% but also increased 22.6% from the year-ago quarter.
The company’s business segments registered robust growth across the board during the quarter, highlighted by a return to growth in Government Systems and 10% revenue growth in Information Management Services.
Although total sales missed the Zacks Consensus Estimate by 1%, sales grew 3.2% year over year due to strength across the segments.
The company has narrowed its fiscal 2016 earnings outlook to the range of $5.50–$5.55 per share from $5.45–$5.65 projected earlier. Revenues are now expected at $5.3 billion versus $5.3–$5.4 billion earlier (read more: Rockwell Collins Tops Q3 Earnings, Cuts FY16 View).
4. Bell-Boeing, a strategic alliance between The Boeing Co. BA and Bell Helicopter, Textron’s wholly owned subsidiary, has won a $544.7 million multi-year modification contract from the U.S. Navy to supply four MV-22 tilt rotor aircraft. Contracting activity is the Naval Air Systems Command, Patuxent River, MA.
Per the modification, the joint venture will provide long lead production materials for the aircraft, and manufacture and deliver the order. The modification is in agreement with the difference in quantity clause for the government of Japan and includes an engineering alteration proposal for the standby flight display (read more: Bell-Boeing Joint Venture Wins U.S. Navy Contract for MV-22).
5. L-3 Communications Holdings’ unit secured a $216.4 million modification contract from the U.S. Army for 12 months of continued contractor aircraft logistics support. The work under the contract will run through Jul 31, 2017, and will be carried out at Madison, MS.
6. Huntington Ingalls Industries won a modification contract from the U.S. Navy to continue providing advance planning for the refueling complex overhaul (“RCOH”) of the USS George Washington (CVN 73).
The contract is valued at $194.8 million and the contracting activity is the Naval Sea Systems Command, Washington DC. The modification extends the contract by 6 months from the previously awarded contract duration of 12 months.
Per the latest modification, Huntington Ingalls will provide advance planning, ship checks, design, documentation, engineering, fabrication and preliminary shipyard or support facility work for CVN 73 RCOH. The company will be responsible for ascertaining labor necessity for engineering and production services for Fukushima remediation, in addition to providing engineering, planning and construction oversight of work performed by the Navy, providers of Norfolk area, and other contractors in managing remediation efforts.
Work is scheduled to be complete by Aug 2017. The company will carry out the work in Newport News, VA.
Performance
The defense sector booked more losses than gains last week. In the last five trading sessions, Rockwell Collins lost the most followed by Raytheon Co. RTN. General Dynamics Corp. GD and Textron remained in the green zone.
The six-month picture shows only gains after weeks of mixed performances. L-3 Communications Holdings was in the leading position with almost 32% share price appreciation followed by Northrop Grumman Corp. NOC.
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 |
-1.29% |
21.76% |
|
BA |
-1.28% |
3.85% |
|
GD |
0.29% |
12.83% |
|
RTN |
-1.75% |
13.41% |
|
NOC |
-1.09% |
20.07% |
|
COL |
-2.63% |
1.99% |
|
TXT |
1.14% |
3.76% |
|
LLL |
-1.35% |
31.75% |
What’s Next in the Defense World?
Boeing, Northrop Grumman and General Dynamics will report their second-quarter 2016 results on Jul 27 before the opening bell.
L-3 Communications Holdings and Raytheon are slated to report their second-quarter numbers on Jul 28.
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