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Analyst Blog

Among the important updates this last one week, Lockheed Martin Corp. (LMT - Analyst Report) was once again in the limelight be it as an artillery supplier, an aeronautics innovator, a space janitor or as a universal business organizer. Space Systems continues to hold the government’s attention as the Pentagon strives to develop a more resilient space division to face emerging security threats. The U.S. Navy selected five defense vendors for the installation of standardized shipboard networks.

(Read the last recap here: Defense Stock Roundup for Aug 19, 2014.)

Iraq Update

Pentagon confirmed that the U.S. military involvement in Iraq will continue owing to the long-term threat from Islamic State (IS). The U.S. revealed that it launched a failed mission in Syria to rescue U.S. hostages being held by the group. Yet the U.S. Department of Defense (DoD) remains focused on the challenges ahead.

Apprehending a serious threat from the extremist group, defense officials said that President Obama has authorized surveillance flights over Syria. This could signal that the president could be considering striking IS militants in territories held by them along the Syria-Iraq border. Defense officials said that the Pentagon will be sending in manned and unmanned reconnaissance flights over Syria, using a combination of drones and possibly U2 spy planes.

Meanwhile, the ongoing airstrikes, advisory groups, humanitarian aid missions and many more in Iraq may influence the defense budget for fiscal year 2015 that has not yet been finalized.

The House had already passed its National Defense Authorization Act prior to the Pentagon releasing its Overseas Contingency Operations request. Meanwhile, the Senate Armed Services Committee has okayed its version. The FY15 defense policy is still awaiting a floor vote in the full Senate.

Recap of the Week’s Most Important Stories

1.    Defense prime Lockheed Martin Corp. acquired Cambridge, MA-based energy storage and conversion technology developer Sun Catalytix Corp. for an undisclosed amount. This addition enhances Lockheed Martin’s potential in the field of energy management and efficiency (read more: Lockheed Martin Purchases Energy Storage Firm Sun Catalytix).

Again, in an attempt to boost its product coverage and enhance market penetration, Lockheed Martin completed the acquisition of Astrotech Corp.’s Astrotech Space Operations business for an undisclosed amount. Astrotech Space Operations is now a wholly owned subsidiary of Lockheed Martin reporting through the Corporation's Space Systems business area.

2.    In a separate development, Lockheed Martin and an Australian technology company – Electro Optic Systems Pty Ltd – joined forces under a space collaboration agreement to set up a joint tracking station using optical systems and lasers to monitor the most dangerous objects in orbit. Both the companies will invest capital as well as technology for the project while it will be staffed by the Australian firm.

Meanwhile, Lockheed Martin’s F-35 Joint Strike Fighter (JSF) – the world’s most expensive weapons system, costing around $400 billion – has completed 19,500 hours of flight time. The defense behemoth reported that the JSF program is maturing steadily having achieved a number of flight-test milestones in Aug 2014, including weapons separation, software compatibility and flight hours.

3.    Five defense contractors grabbed a U.S. Navy deal – valued at $2.5 billion – to build and deliver the service’s next-generation tactical afloat network, Consolidated Afloat Networks and Enterprise Services (CANES). The program is aimed at equipping every ship in the fleet with a standards-based network.

The U.S. Navy’s Space and Naval Warfare Systems Command selected BAE Systems Technology Solutions & Services, General Dynamics C4 Systems, Global Technical Systems, Northrop Grumman Systems Corp. and Serco, Inc. for the indefinite-delivery, indefinite-quantity, firm-fixed-price, cost-plus-fixed-fee contracts. The contract has an eight-year ordering period with completion slated for Aug 2022.

4.    General Dynamics Corp.’s (GD - Analyst Report) unit – General Dynamics Bath Iron Works – secured a $100 million contract from the U.S. Navy to provide planning yard services for the Littoral Combat Ship (LCS) program. Bath Iron Works will provide maintenance and modernization support for all Navy LCS 1 and LCS 2 variant ships. This general Dynamics unit is also the planning yard for the DDG 51 and FFG 7 ship classes.

Performance

Though the defense biggies are going through a tough session with their share prices creeping up at a snail’s space, all the big defense stocks have nonetheless closed in the green over the last five days, except for Northrop Grumman Corp. (NOC - Analyst Report). The biggest gainer was Lockheed Martin with Boeing close at its heels.

However, in the past six months, the market reaction has been more or less mixed. Although a few defense companies like Lockheed Martin, The Boeing Co. (BA - Analyst Report), General Dynamics and Northrop Grumman Corp. have reported in the green, other behemoths like Raytheon Co. (RTN - Analyst Report), Rockwell Collins (COL - Analyst Report), Textron Inc. (TXT - Analyst Report) and L-3 Communications Holdings Inc. (LLL - Analyst Report) were in negative territory. General Dynamics is the sole defense stock to have gained in the double digits over the six-month time frame.

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

+2.10%

+9.40%

BA

+1.93%

+0.03%

GD

+1.48%

+14.15%

RTN

+1.11%

-1.00%

NOC

-0.25%

+6.04%

COL

+1.16%

-6.64%

TXT

+0.52%

-2.83%

LLL

+1.49%

-3.86%

 
What’s Next in the Defense World?

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 of 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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