Back to top

Image: Bigstock

Defense Stock Roundup: Trump's NATO Remarks Hurt Stocks

Read MoreHide Full Article

Last Friday, President Trump might have offended a few North Atlantic Treaty Organization (NATO) allies, while trying to persuade them to contribute more for the NATO defense fund. In particular, he accused Germany of owing ‘vast sums ‘to the U.S. and NATO. He also claimed that Germany is enjoying the benefit of an expensive defense base at the cost of the U.S.

Trump’s claims were strongly opposed by German defense minister Ursula von der Leyen as well as U.S. experts. Although many expect this ‘Trump effect’ to induce an uptick in contribution from NATO allies that will boost defense stocks in the future, for the time being, Trump’s allegations and counter-accusations seem to have created an uproar in the Aerospace-Defense space.

Consequently, major indices of the Aerospace-Defense sector ended up in the red in the trailing five trading sessions. The S&P 500 Aerospace & Defense (industry) Index dropped 0.8% while the Dow Jones U.S. Aerospace & Defense Index declined 1.3%. Nevertheless, a generous flow of funds from the Pentagon continued to boost the sector.

Among last week’s other highlights, defense primes The BoeingCompany (BA - Free Report) , Northrop Grumman Corp. (NOC - Free Report) and Lockheed Martin Corp. (LMT - Free Report) secured a few handsome contracts from the Department of Defense (DoD). AAR Corp. (AIR - Free Report) meanwhile reported its quarterly results.

(Read Defense Stock Roundup for Mar 15, 2017 here)

Recap of Last Week’s Most Important Stories

1. Aircraft major Boeing secured a modification contract worth $3.28 billion for supplying lot 7-11 of AH-64E Apache attack helicopters to the government of Saudi Arabia. The contract was awarded by the U.S. Army Contracting Command, Redstone Arsenal, AL. Work related to this multi-year deal is expected to be over by Jun 30, 2022.

Per the terms of the agreement, Boeing will offer full-rate production of remanufactured aircraft and new build aircraft, remanufacture and new build Longbow crew trainers, peculiar ground support equipment, initial spares, integrated logistics support, and engineering technical services. The company will carry out the work for this contract in Mesa, AZ.

Boeing’s AH-64 Apache is the world’s most advanced multi-role combat helicopter and is used by the U.S. Army and a growing number of international defense forces. AH-64E is the latest version of the AH-64 gunship and is equipped with new sensors, avionics and improved night operation capabilities. (Read more: Boeing Inks $3.3B FMS Deal to Supply AH-64E Apache Copters)

Boeing won another modification contract worth $371.2 million for providing performance-based supply chain support for the F-15 platform. Work under this deal is scheduled to be over by Mar 14, 2022.

This contract has been awarded by the Defense Logistics Agency Aviation, Philadelphia, PA.The company will carry out work under this project in Missouri and Georgia.

Boeing’s F-15 Strike Eagle is a twin-engine, all weather tactical fighter aircraft. Its proven design is undefeated in air-to-air combat, with more than 100 aerial combat victories. (Read more: Boeing Wins $371M Contract to Support F-15 Platform)

2. Defense giant Northrop Grumman has won a Navy contract for the production of littoral combat ship (LCS) gun mission modules. The majority of the work related to this deal will be executed in Portsmouth, VA, Huntsville, AL and Bethpage, NY, and the rest at various locations across the U.S.

Valued at $68.8 million, this contract was awarded by the Naval Sea Systems Command, Washington, D.C.  However, this contract has a potential value of $812 million, if the options included in this agreement are exercised.

Littoral combat ships are resilient flexible warships. Defense primes Lockheed Martin and General Dynamics Corp. (GD - Free Report) are the two primary contractors of the LCS. Gun mission module (GMM) is an integral part of LCS Surface Warfare (SUW) Mission Package used for counter-piracy, maritime interdiction and security missions. (Read more:Northrop Grumman Wins LCS Gun Module Deal Worth $812M)

3. Pentagon’s prime defense contractor Lockheed Martin’s Rotary and Mission Systems (RMS) business division secured a modification contract worth $80.6 million for providing support services for the Advanced Electronic Guidance and Instrumentation System (AEGIS) program.The contract was awarded by the Naval Sea Systems Command, Washington, D.C.

This defense contract involves foreign military sales (“FMS”) to support the naval forces of Japan, South Korea, Norway, Australia and Spain through AEGIS implementation studies for future FMS shipbuilding programs. Work is scheduled to be completed by Nov 2019.

Lockheed Martin’s AEGIS Ballistic Missile Defense (ABMD) is the naval component of the U.S. Missile Defense Agency's (MDA) Ballistic Missile Defense System (BMDS).Its latest configuration, Baseline 9, offers an open architecture framework to allow extreme flexibility. (Read more: Lockheed Martin Unit Wins $81M AEGIS Support Contract)

Lockheed Martin’s RMS business division won another modification contract worth $98.5 million to produce Surface Electronic Warfare Improvement Program (SEWIP) Block 2 subsystems.The deal was awarded by the Naval Sea Systems Command, Washington, D.C.

This SEWIP development program is expected to “expand upon the receiver/antenna group,” which is essential for upgrading the capabilities to counter threats as well as enhance system integration. Work is scheduled to be completed by Jul 2019.

SEWIP Block 2 is the latest version of the "blocks" that the Navy is pursuing for its shipboard electronic warfare system. Its electronic warfare systems feed information to the warfighter, thereby providing it time to respond even before an attack has been initiated. (Read more: Lockheed Martin Unit Wins $98M SEWIP Block 2 Contract)

Lockheed Martin’s CEO Marillyn Hewson recently highlighted the company’s future growth plans at the annual media day event.Based on the better-than-expected results that Lockheed Martin was able to generate during 2016, management set a goal to expand the company’s international sales growth rate to 30% in the next few years.

Moreover, 50% of all F-35 orders over the next five years are anticipated to come from international customers. With respect to its expansion strategy, management has recognized Lockheed Martin’s well-known F-35 program as the largest driver of international growth in the future.

Further, Lockheed Martin, along with the U.S. government and Aerospace-Defense industry has launched the “Blueprint for Affordability” and “Sustainment Cost Reduction Initiative.” These initiatives are aimed at saving more than $5 billion for F-35 customers. (Read more:Will Lockheed Gain from CEO's Plan for Future Growth?)

4. AAR Corp. reported third-quarter fiscal 2017 earnings of 38 cents per share which were in line with the Zacks Consensus Estimate. Earnings were up 31% year over year.

Net sales came in at $446.7 million for third-quarter fiscal 2017, beating the Zacks Consensus Estimate of $422 million by 5.8%. Revenues were also up 8.4% year over year.

AAR Corp's cash and cash equivalents as of Feb 28, 2017 were $10.1 million, down from $31.2 million as of May 31, 2016.During the fiscal third quarter, the company paid dividends of $2.5 million or 7.5 cents per share. (Read more: AAR Corp Q3 Earnings Meet Estimates, Revenues Up Y/Y)

Last Week’s Performance

The defense biggies posted dismal numbers over the past five trading sessions. Raytheon Company lost the most as its share price dropped 2.43%. Others followed suit.

However, over the past six months, all the industry majors delivered a stellar performance. Notably, Boeing gained the maximum at 28.96%, followed by General Dynamics.

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

CompanyLast WeekLast 6 Months
LMT-0.91%16.08%
BA-1.58%28.96%
GD-1.92%25.17%
RTN-2.43%11.26%
NOC-1.94%10.64%
COL-1.28%22.83%
TXT-1.74%20.19%
LLL-0.71%14.35%

 

More Stock News: This Is Bigger than the iPhone!   

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020. Click here for the 6 trades >>

Published in