The Federal Reserve’s rate hike approval on Dec 14, the second in almost a decade, has impacted the U.S. stock market. Although the rate hike was widely anticipated, the Fed’s projection of three more hikes next year has surprised investors. While a rate hike hints at a stable economy, additional hikes raise the possibilities of lower corporate profits and slowing down of economic growth.

A similar trend was observed in the major indices of the aerospace and defense industry as well. Essentially, stocks in these industries are non-cyclical in nature, however, an economic downturn affects all. Meanwhile, last week’s performance of the industry reveals quite a dismal picture. Even if we ignore the rate hike projection, President-elect Donald Trump’s view of project costs as “out of control,” has dealt a severe blow to defense primes like Lockheed Martin and Boeing in particular. Consequently, the S&P 500 Aerospace & Defense (Industry) index slipped 1.8%, while the Dow Jones U.S. Aerospace & Defense Index dropped 2.5% during the last five trading sessions.

Yet, a generous flow of funds to prime defense contractors from Pentagon was witnessed. Among last week’s highlights, defense majors Leidos Holdings, Inc. (LDOS Quick QuoteLDOS - Free Report) , Raytheon Company , The Boeing Company (BA Quick QuoteBA - Free Report) and Lockheed Martin Corp. (LMT Quick QuoteLMT - Free Report) have clinched a number of important contracts from the Pentagon. Moreover, Boeing raised its dividend by 30%, beating most analysts’ expectations while United Technologies Corp. issued its 2017 EPS and sales projections.

(Read Defense Stock Roundup for Dec 8, 2016 here.)

Recap of the Week’s Most Important Stories

1. Leidos recently secured a foreign military sales (FMS) contract for Joint Mission Planning System (JMPS) engineering integration. Valued at $350 million, this deal was awarded by the Air Force Life Cycle Management Center, Hanscom Air Force Base, MA.  

Per the terms of the contract, Leidos will provide delivery of JMPS Mission Planning Environment and JMPS Integrated Build Environments. Work related to this deal is scheduled to be over by Dec 7, 2027. The company will utilize fiscal 2016 and 2017 research, development, test and evaluation; operations and maintenance; procurement; and foreign military sales funds to complete the contract.

Notably, the JMPS of the U.S. Air Force is a Windows XP or Vista PC-based common solution that facilitates AirForce’s aircraft mission planning. This technology is used to conduct detailed mission planning, ranging from simple training to complex combat scenarios.

2. Lockheed Martin’s unit Sikorsky Aircraft Corp. won a modification contract to exercise an option for VH-3D/VH-60 Executive Helicopter Special Progressive Aircraft Rework sustainment support services. Valued at $138 million, this deal was awarded by the Naval Air Systems Command, Patuxent River, Maryland.

Per the terms of the contract, Lockheed Martin will remodel the President’s helicopter and offer services in the field of security, project engineering, integrated logistics support, VIP Helicopter training, and support for the Presidential Helicopters Program. Work related to this deal is expected to be over by Nov 2022.

Note that thepurchase of the Sikorsky Aircraft last November has strengthened Lockheed Martin’s position as the largest defense contractor in the U.S. Given the company’s proven success in the combat aircraft business line, the company is expected to win more such contracts going forward. This in turn will significantly boost future growth of this business division (read more: Lockheed Martin's Sikorsky Wins $138M Navy Contract).

3.Defense behemoth Raytheon’s business unit, Integrated Defense Systems, clinched a modification contract for the Air and Missile Defense Radar Program (AMDR) S-Band Radar (ADMR-S) and the Radar Suite Controller (RSC). Valued at $110.2 million, the contract was awarded by the Naval Sea Systems Command, Washington, D.C.

Per the contract, Raytheon will exercise an option for the fiscal 2017 low-rate initial production long lead material. Work is scheduled to be complete by Dec 2017.

Notably, AMDR AN/SPY-6(V) is the next-generation integrated air and missile defense radar used by the Navy. Its new S-band radar will be incorporated with the X-band radar, a horizon-search radar based on existing technology; and the RSC, a new component that controls radar resources and is integrated into the ship’s combat management system (read more: Raytheon Clinches $110M Navy Contract for Radar Program).

Meanwhile, Raytheon gained another contract from the Naval Supply Systems Command Weapon Systems Support, PA for supporting the repair of 10 weapon replaceable assemblies for the AN/ALR-67(V)3 on the F/A-18 A/B/C/D/E/F aircraft. With an initial value of $101.9 million, the contract spans over a base period of four years and has an additional one-year option, which can reach the contract value to $128.2 million.

Work related to the contract is scheduled to close by Dec 2020. Notably, the F/A-18 aircraft, manufactured by Boeing, is a twin-engine, supersonic, all-weather, multirole fighter jet that is capable of landing and taking off from an aircraft carrier (read more: Raytheon Secures Navy Contract Worth $101.9 Million).

4. Aerospace major Boeing recently bumped up its quarterly dividend by 30% and authorized a new stock repurchase plan of $14 billion, which replaced the company’s existing share buyback program. Boeing will now pay a quarterly dividend of $1.42 per share, up from $1.09 paid earlier.

Boeing has also declared the completion of its share buyback program for 2016. The company spent $7 billion out of the original $14 billion authorization announced last December. Notably, the new approval takes the total authorization to $14 billion again.

This dividend hike is in line with estimations by Morgan Stanley (MS Quick QuoteMS - Free Report) analysts issued last week, which back then was considered way above the estimates of analysts at other firms (read more: Boeing Announces 30% Dividend Hike: Time to Buy the Stock?)

Moreover, Boeing won a FMS contract worth $60 million from the U.S. Air Force for deliverables to support the Saudi Arabian military.

Per the terms of the contract, Boeing will provide one Database Generation System, one Full Mission Trainer (FMT)/Integrated Avionics Trainer (IAT) database, convert the Boeing Aircrew Trainer-Continuous resolution visual system (BAT-C) into an FMT, transform the BAT into an IAT and manufacture one FMT.

Internationally, the company is witnessing strong demand for its defense products, such as fighter jets, the rotorcraft lineup and 737-based military derivatives (read more: Boeing Wins $60M Air Force Contract for FMS to Saudi Arabia).

5. Diversified conglomerate United Technologies recently announced its expectations for 2017. The company maintained its adjusted earnings per share projection at the range of $6.30 to $6.60. Sales for 2017 are expected in the band of $57.5–$59 billion, with organic sales growth estimated at around 2–4%.

In comparison, the Zacks Consensus Estimate for earnings stands at $6.65 and that for revenues is at $59.17 billion for 2017.

Moreover, management expects to witness improved organic sales growth and solid cash generation in 2017 despite a slow growth macro-environment and continued investments in aerospace.

Performance

The major defense stocks have put up mostly a weak performance over the past five trading sessions, with most of the stocks taking a beating. Lockheed Martin lost the maximum at 2.7%, while General Dynamics Corp. (GD Quick QuoteGD - Free Report) and Rockwell Collins Inc. managed to end in the green, rising just below 1%.

For the past six months, the overall picture in the industry has been quite assuring with most stocks gaining ground. Notably, Textron Inc. (TXT Quick QuoteTXT - Free Report) gained the most followed by General Dynamics.

The following table shows the price movement of the major defense players over the past five trading days and during the last six months

What’s Next in the Sector?

Honeywell International Inc. (HON Quick QuoteHON - Free Report) will hold its 2017 Outlook Conference Call on Dec 16.

AAR Corp. (AIR Quick QuoteAIR - Free Report) will release its second-quarter fiscal 2017 numbers on Dec 21.

Confidential: Zacks' Best Investment Ideas 

Would you like to see a hand-picked "all-star" selection of investment ideas from the man who heads up Zacks' trading and investing services? Steve Reitmeister knows when key trades are about to be triggered and which of our experts has the hottest hand. Click for his selected trades right now >>