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Over the past five trading days, there has been a lull in the defense sector with the major companies continuing to trade in the red. Although the sector snapped up a few big deals, investors were not too impressed with defense stocks leading to big sell-offs in many names. Yet, the sector tried to plug the budget challenges and resorted to acquisitions.

Among the important updates in the past one week, Lockheed Martin Corp. (LMT - Analyst Report) was once again in the headlines with a big satellite deal. Just as Pentagon strives to develop a more resilient space division to counter emerging security threats, the defense contractors specializing in space systems continue to gain from it. Again, United Technologies Corp. (UTX - Analyst Report) signed a deal with Canada for the delivery of 28 maritime helicopters on the Canadian Maritime Helicopter Program. On the flipside, The Boeing Co.’s (BA - Analyst Report) share price continued to suffer, failing to win back investor confidence (see the last recap here: Defense Stock Roundup for June 17, 2014).

Iraq Anarchy

Bloodshed in Iraq saw no respite this last week with the al-Qaeda connected Sunni militant group, the Islamic State in Iraq and Syria (ISIS), capturing a pair of crucial border crossings with Syria and Jordan. In addition to their control in northern Iraq, the insurgents have now strengthened their hold in the western province of Anbar and were controlling Al-Qaim, Rawa, Ana and Husaybah.

With mounting pressure on the U.S. to intervene, the first U.S. service troops arrived in Iraq to help the Iraqi military to counter the advancing Sunni insurgency. About 90 troops have arrived in Baghdad and they will join some 40 others attached to the U.S. Embassy. They will establish assessment teams and a joint operations center with Iraqi forces. These troops were amongst the first that President Barack Obama had in mind last week when he ordered to send up to 300 military troops to Iraq. Moreover, four additional teams totaling about 50 people will arrive in Iraq in the coming days.

Pentagon said that the U.S. and Iraq have struck a deal under which legal protections will be given to American commandos deployed in Iraq. The department also confirmed that the troops will only assess the state of the Iraqi army and will not stage any attacks against ISIS.

Ominously, the insurgents, who want to establish their own state in Iraq and Syria, are reportedly pushing toward the capital city of Baghdad. With the possibility of rising aggression in Iraq, the defense stocks may see some quick gains.

Recap of the Week’s Most Important Stories

1.   Lockheed Martin – Pentagon’s prime contractor – continues to defy sequestration. It grabbed a U.S. Air Force deal valued at $1.9 billion. The contract calls for Lockheed Martin to complete work on two missile-warning satellites as part of the Space-Based Infrared System (SBIRS) program (read more: Lockheed Martin Clinches $1.9B GEO-5 and GEO-6 Satellite Contract).

2.    In a separate development, Lockheed Martin recently entered into a definite agreement to acquire Deposition Science Inc., a supplier of thin-film coatings. The to-be-acquired business will merge with its Aeronautics business arm. More goods news flowed in at Lockheed Martin’s Aeronautics division as it won a $222.9 million Air Force modification contract for lending services to the C-5 Reliability Enhancement and Re-engining Program (read more: Lockheed Boosts Asset Portfolio, Seals an Air Force Deal).

3.    Defense contractor Raytheon Co.’s (RTN - Analyst Report) Missile Systems division will build radio-controlled anti-tank missiles for the U.S. Army and Marine Corps, as well as for the Saudi Arabia and Oman militaries under a contract modification valued at $391.5 million. Deliveries will continue through Mar 2018.

4.    Los Angeles based defense contractor Northrop Grumman Corp. (NOC - Analyst Report) won a $238 million modification contract to provide infrared countermeasure systems to the U.S. Air Force. The deal entails Northrop Grumman to deliver additional transmitters, missile warning sensors, processors, lasers, control interface units and supporting equipment over the next two years for the Large Aircraft Infrared Countermeasure (LAIRCM) system.

5.    Sikorsky Aircraft Corp., a unit of diversified conglomerate United Technologies, signed a deal with Canada for the delivery of 28 maritime helicopters, thereby ending a long and costly dispute (read more: United Tech Amends Canada Deal, Reaffirms Guidance).

Performance

Despite important deals won from the Pentagon in the past one week, shares of all defense biggies were in the red. The biggest loser Textron Inc. dropped 4.38% over the time frame, with Boeing following suit. In the past 6 months, the companies have reported in the green (except for Boeing), though they are gradually losing their momentum. General Dynamics Corp. (GD - Analyst Report) and L-3 Communications Holdings Inc. (LLL - Analyst Report) registered double-digit share price growth, with the former leading the way. All other biggies have reported single-digit share price appreciation in the six months time fame while Boeing is slowly losing its spot with a telling 6.60% decline. The following table shows the price movement of the major defense players over the past 5 trading days and during the last 6 months.
 

Company

Last Week

Last 6 months

LMT

-0.45%

+9.18%

BA

-2.20%

-6.60%

GD

-2.06%

+23.04%

RTN

-1.65%

+3.50%

NOC

0.00%

+4.58%

COL

-1.89%

+5.43%

TXT

-4.38%

+4.56%

LLL

-2.06%

+13.28%


What’s Next in the Defense World?

The aerospace and defense sector is getting accustomed to budget cuts and the easy upward slope of last year is likely to hit a plateau. Yet, the ongoing Iraqi civil war, escalating tensions in Eastern Europe and demand for defense products in the Middle East and other Asian nations may keep the hope alive.

We remind investors that the Zacks Industry Rank for aerospace/defense is within the top one-third of the list of 260-plus industries. Hence, the prospects for this industry are still very much in place. We however expect the slightly flat-to-bearish run of the defense stocks to persist in the coming days (to know more please see: Zacks Industry Rank).

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