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Over the last five trading sessions, second-quarter results from the defense primes have grabbed the headlines. Although the defense contractors witnessed lower revenues in the quarter, the picture was overall reassuring with a number of earnings beats. There was also some improvement on the guidance front. Yet, most of the big defense stocks closed in the red over the last five trading sessions.
 
(Read the last recap here: Defense Stock Roundup for Jul 22, 2014).

Iraq Update
 
The U.S. has boosted its surveillance efforts and has sent more military advisers to Iraq. According to the Pentagon, 20 more military advisers recently arrived in Iraq. This brought the total U.S. military personnel there to 825.

Pentagon officials are worried about the continued threat that the extremist group poses to the security of U.S. personnel and associates. The officials insisted that the Islamic State in Iraq and Syria (ISIS) is not just a group but a "full-blown army." Simply military support will not just do to address the instability in Iraq. The creation of a new Iraqi government would be the key to reducing ISIS’ strength. The U.S. is also conducting a study of a likelihood of drone strikes in Iraq.

U.S. officials are all in favor of a new government that will reject exclusionist policies that Washington believes have stirred dissent under Prime Minister Nouri al-Maliki.

Meanwhile, the Iraqi ambassador Lukman Faily lamented that Washington was sending mixed signals to Baghdad regarding its true intentions of military support.

Pentagon’s top priorities in Iraq have been to enhance U.S. intelligence, support the formation of a new government and help Iraqi forces to hold back the ISIS.
 
Recap of the Week’s Most Important Stories
 
1.    Pentagon’s prime contractor and the world’s largest defense company, Lockheed Martin Corp. (LMT - Analyst Report) reported a forecast-beating 4.5% rise in second-quarter 2014 earnings per share, backed by strong operational performance. The company raised its 2014 earnings guidance, reflecting lower pension costs and an improved outlook for its space unit (read more: Lockheed Martin Beats on Q2 Earnings and Sales, Boosts View).

2.    Northrop Grumman Corp. (NOC - Analyst Report) reported higher profits in the second quarter despite missing analyst expectations. The company also raised its earnings guidance for the year, with international sales expected to reach 13% of total sales, up from 10% in 2013. The growth will likely come from unmanned aerial vehicles and cybersecurity work (read more: Northrop Grumman Misses on Q2 Earnings yet Guides Higher).

3.    Pentagon’s No. 3 contractor, General Dynamics Corp. (GD - Analyst Report) reported better-than-expected second quarter earnings. Yet, its revenues fell 4.6% in the quarter, missing the Street expectation. The company’s aerospace division, which manufactures the commercial Gulfstream jet, experienced a sales decline of 2.8%.

Nonetheless, the company expects orders for Gulfstream jets to remain robust through the year. The company increased its overall profit outlook for the year to $7.40 to $7.45 per share from its earlier forecast of $7.05 to $7.10 per share. The company’s cost cutting initiatives spurred profitability even as defense spending by the U.S. government remained low (read more: General Dynamics Beats Q2 Earnings Estimates on Cost Control).

4.    The Boeing Company (BA - Analyst Report) delivered upbeat second quarter 2014 results backed by robust deliveries and soaring profits (up 45% year over year). Moreover, Boeing raised its full-year 2014 earnings outlook (read more: Boeing Q2 Earnings Beat Comes on Higher Deliveries, Ups View).

5.    Although the world’s largest missile manufacturer Raytheon Co. (RTN - Analyst Report) met the earnings consensus, its top line came above the Street estimate. Revenues nonetheless took a beating year over year in a budget-constrained U.S. defense market (read more: Raytheon Company Meets Q2 Earnings Estimates, Reaffirms View).

6.    Rockwell Collins Inc.’s (COL - Analyst Report) fiscal third-quarter 2014 earnings improved from the prior-year figure by a penny. The company’s spurt of recent acquisitions led to higher revenues (read more: Rockwell Collins Beats Q3 Earnings Estimates, Sales Rise Y/Y).

Performance
 
Defense stocks have been choppy over the past one week given lackluster top-line performances. Although the defense primes have modestly lifted their bottom-line outlook, investors are not too impressed. This has led to big sell-offs in many names. The biggest loser Rockwell Collins dropped 5.91% over the time frame, with Textron on its heels. Although Boeing’s profits surged considerably, it failed to stem the rot in its share price, which declined 4.59% over the period.

However, in the past six months, most of the defense companies have reported in the green (except for Boeing and Rockwell Collins). Lockheed Martin, General Dynamics, Northrop and L-3 Communications Holdings Inc. (LLL - Analyst Report) registered double-digit share price appreciation, with GD leading the way. Boeing and Rockwell Collins have, however, lost 5.18% and 0.29%, respectively.

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

+2.76%

+15.37%

BA

-4.59%

-5.18%

GD

+1.67%

+21.68%

RTN

-2.62%

+5.25%

NOC

+2.04%

+13.97%

COL

-5.91%

-0.29%

TXT

-5.27%

+2.52%

LLL

-1.53%

+16.45%

 
What’s Next in the Defense World?
 
L-3 Communications Holdings and Embraer S.A. are slated to report their second-quarter earnings on Jul 31 before the market opens.
 
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