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RTX or LMT: Which Defense Stock Will Deliver Better Q4 Earnings?

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The Q4 reporting cycle for defense stocks is going to start today with Hexcel Corp. (HXL - Free Report) scheduled to release its quarterly figures, after market close. Looking ahead, a handful of major defense players are set to reveal their Q4 numbers this week.

Factors that Influenced Defense Stocks

Although a gradual recovery has been observed in the global air travel since the middle of the third quarter of 2020, the pace has been too slow and certainly not anywhere near the pre-pandemic levels. Therefore, the impact of coronavirus-induced poor air traffic on commercial aerospace persisted through the fourth quarter. This must have dragged down revenues and earnings of defense stocks, especially those which have a strong presence in the commercial aerospace market.   

On a brighter note, we expect the stocks that are more focused on the combat side of the industry to be better off as a result of steady government support. In fact, a handful of notable deals have been witnessed coming from the Pentagon when compared to the prior couple of quarters.

Nevertheless, the pandemic continued to be an overhang on defense stocks’ quarterly performance since they had to bear significant expenses for storage of finished products in storage facilities and warehouses. This is because timely delivery of products was not possible due to stringent business restrictions in some parts of the world along with cash crunch.

Also, low delivery volumes of finished products indicate possible revenue shortfall for many of the defense manufacturing corporations.

Considering the aforementioned factors, we remain a bit skeptical about the broader Aerospace sector, which constitutes defense stocks.

Q4 Projections

Aerospace sector Q4 earnings are expected to decline 5.3% year over year while revenues are projected to be down 1.6%.  

For more details on quarterly releases, you can go through the latest Earnings Preview.

Defense Stocks to Watch

Let's take a look at two defense companies that are scheduled to report fourth-quarter 2020 earnings on Jan 26 and find out how things have shaped up prior to the announcements.

Raytheon Technologies Corp. (RTX - Free Report) delivered a positive earnings surprise of 20.83% in the last reported quarter. The company’s fourth-quarter results are likely to reflect better-than-expected positive synergies from the merger that took place between Raytheon Company and United Technologies in April 2020.

However, adverse impacts of COVID-19 on the aerospace industry that have been affecting commercial OEM as well as commercial aftermarket sales are expected to have dragged down its Q4 revenues (read more: What Awaits Raytheon Technologies in Q4 Earnings?).

According to the Zacks model, the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. You can see the complete list of today’s Zacks #1 Rank stocks here.

Raytheon Technologies currently has an Earnings ESP of 0.00% and a Zacks Rank #4 (Sell). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Lockheed Martin (LMT - Free Report) delivered a positive earnings surprise of 2.97% in the last reported quarter.  Its Aeronautics business segment is projected to reflect impressive Q4 figures, with the company having delivered a handful of military jets during the soon-to-be-reported quarter.  

Its other segments are also expected to have delivered encouraging performance during the fourth quarter, which cumulatively must have boosted its overall revenue expectation.  Moreover, its resilient portfolio makes us confident about the company’s ability to generate solid bottom-line growth.

Lockheed has an Earnings ESP of -0.54% and a Zacks Rank #3 (read more: Will Segmental Performance Aid Lockheed's Q4 Earnings?).

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