Don't be influenced by widespread concerns that budgetary belt-tightening on Capitol Hill will hit the bottom lines of U.S.-based defense contractors. Every fiscal year, no matter how constrained is the funding picture, the Pentagon almost always gets its way.
This is quite evident from the recent Zacks Earnings Trend. The earnings beat ratio of 77.8% of the aerospace and defense companies that have already unfolded their Q3 earnings results is a stellar 85.7%.
These defense companies were not only up against the ongoing budget austerity but were subject to a tepid economic growth scenario throughout the third quarter of 2015. Growth remained challenged for most of the quarter thanks to a strong dollar and weak energy prices. Moreover, the persistent slowdown in China deepened global economic woes. Cracks began to appear in the economy at a time when the U.S. was reasserting itself as the global growth leader.
In spite of the macro issues, the defense companies held up well this past quarter. They have not only reported better-than-expected results but also lifted their views. Let’s have a look at some of the defense companies that have crushed the Street expectations this Q3 season:
Lockheed Martin Corp. (LMT - Free Report)
The Pentagon’s prime contractor – Lockheed Martin − opened this earnings season with robust third-quarter profits. It reported better-than-expected earnings along with higher revenues, solid margins, and strong cash flows, buoyed by robust sales of its F-35 Joint Strike Fighter. The solid quarterly results have enabled it to lift its 2015 guidance for sales, operating profit, and EPS.
Lockheed Martin continues to be a strong cash generator helping it to take important cash deployment decisions. In the third quarter, it achieved over $1.5 billion in cash from operations compared with $990 million a year ago. Also, during the quarter, the company’s board of directors approved two major moves in the areas of cash deployment.
First, Lockheed Martin increased its quarterly dividend by 10%, bringing the annualized payout to $6.60 per share from $6.00 per share earlier. This marked the 13th consecutive annual double-digit increase in Lockheed Martin’s quarterly dividend rate. Along with that, this defense behemoth has also increased its share repurchase authorization by $3 billion, consistent with its plan to have less than 300 million shares outstanding by the end of 2017.
This military super hero is the main beneficiary of war and armed conflict, of which the world has no dearth. The company's third-quarter results reveal that this defense company is overflowing with orders, comprising both foreign and domestic, that will boost its bottom line through 2016 and beyond.
The Boeing Company (BA - Free Report)
Aerospace giant delivered third-quarter 2015 adjusted earnings of $2.52 per share, confidently beating the Zacks Consensus Estimate by 13.5%. Earnings also increased 18% year over year on the back of strong operational performance.
Revenues came in at $25.85 billion for the quarter, exceeding Street expectations by 4.5% and improving 9% from the year-ago level on solid commercial aircraft deliveries. Free cash flow was strong at $2.3 billion compared with $317 million a year ago.
The company raised its full-year earnings outlook to the range of $7.95–$8.15 per share from the prior guidance of $7.70–$7.90 per share. Boeing also lifted its revenue guidance for the year to the range of $95−$97 billion from $94.5–$96.5 billion expected earlier driven by increased commercial delivery outlook.
Northrop Grumman Corp. (NOC - Free Report)
Just after winning a multibillion-dollar contract to build a new U.S. bomber, Northrop reported solid third quarter 2015 results with revenue and earnings beating the Street expectations by 6% and 2.4%, respectively. The maker of the current B-2 bomber and Global Hawk unmanned planes has also increased its profit outlook for the full year.
Operating margin expanded to 13.3% from 12.9% due to higher pension adjustments and a $21 million decrease in corporate expenses. Chief Executive Officer, Wesley Bush, said that the international market accounted for 15% of its business so far this year and the company is witnessing demand from Europe on the Triton plane.
Northrop reported a 3.9% rise in third-quarter adjusted earnings to $2.41 per share from $2.32 a year earlier. It also raised the low end of its 2016 revenue guidance.
Apart from the solid earnings report, Northrop shares climbed 5.48% on Wednesday after winning a contract from the Department of Defense for the Long Range Strike Bomber (LRS-B), beating out a Boeing-Lockheed Martin team. The new B-3 bomber will replace Boeing's B-52s, which have been in operation since the 1950s. The Air Force plans to buy 80 to 100 of the new airplanes, and the contract could go up to $50 billion to $80 billion. The first airplanes are scheduled to enter service around 2025.
General Dynamics Corp. (GD - Free Report)
The company’s third-quarter earnings from continuing operations of $2.28 per share topped the Street consensus by 8.6% and also increased 11.2% from the year-ago period on the back of higher defense orders and solid demand for its Gulfstream airplanes.
Revenues of $7.99 billion surpassed the Street expectation by 3.1%. Notably, General Dynamics delivered 31 "outfitted" large-cabin aircraft in the third quarter, up by 6 units, while deliveries of mid-cabin jets doubled to 12.
General Dynamics’ third-quarter results were also driven by international defense orders, comprising a contract announced in September to refurbish and upgrade 150 Abrams tanks for sale to the Kingdom of Morocco.
The company raised its 2015 profit outlook based on Q3 results, higher deliveries of Gulfstream business jets and surging sales at the submarine-building unit. Earnings are expected to be between $8.90 and $9.00 per share for 2015, up from $8.70 to $8.80 projected earlier.
Textron Inc. (TXT - Free Report)
Diversified U.S. conglomerate Textron reported third-quarter 2015 earnings from continuing operations of 63 cents per share, beating the Zacks Consensus Estimate of 60 cents by 5%. The reported figure also increased 10.5% from the year-ago quarter, driven by solid margin contribution across all its segments despite the plunge in revenues.
The company’s share prices also moved north as the maker of Bell helicopters and Cessna business jets is valiantly weathering turbulence in the aerospace market. Although Bell was hurt by slumping oil and gas industry demand, its 13.1% margin grew from a year earlier, reflecting solid performance.
Profit for 2015 is now expected to be $2.40 to $2.50 a share, narrower than the earlier forecast range of $2.30 to $2.50.
Although a stronger dollar and budget austerity were deterrents, we believe these stocks have played well in this earnings season considering their cost-cutting measures, stock buybacks and earnings gains from overseas businesses.
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