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Defense Stock Roundup: Lockheed Martin, Boeing Nab Big Contracts; Raytheon Upbeat on Patriot

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The broader markets have continued their rally last week, with the major indexes trading in the green. This has helped the defense stocks over the last five trading sessions as well. The S&P 500 Aerospace & Defense (Industry) index and Dow Jones U.S. Aerospace & Defense Index climbed 1.02% and 1.23%, respectively, in the last five trading sessions.

With Lockheed Martin (LMT - Free Report) , the leading player, kick starting the defense earnings season today, let’s have a look at the expectations for the sector. The outlook for the aerospace and defense sector is quite good when compared with the overall Q2 forecast. Total earnings are likely to be down 5.4% on 05% lower revenues, with growth in the negative territory for 9 of the 16 Zacks sectors.

In contrast, the aerospace and defense sector is expected to register a 5.4% increase in earnings on 1.4% revenue growth.

While most of the focus will be on earnings releases, the contractors continue their business of picking up awards from the Pentagon’s daily funding session. Lockheed Martin and Boeing (BA - Free Report) won contracts from the Department of Defense (DoD) while AAR Corp. (AIR - Free Report) reported its fourth quarter fiscal 2016 results. Raytheon Co (RTN - Free Report) showed optimism about continued sales of its Patriot air defense missile systems.
 
(Read Defense Stock Roundup for Jul 12, 2016 here.)

AEROSPACE/DEFENSE Industry Price Index

AEROSPACE/DEFENSE Industry Price Index

Recap of the Week’s Most Important Stories

1.    Aerospace and defense products and services supplier AAR Corp. reported fourth-quarter fiscal 2016 earnings of 32 cents per share, missing the Zacks Consensus Estimate of 45 cents by 28.9%. The company had reported a loss of 97 cents per share in the year-ago quarter.

The company’s revenue also missed the Street estimates but improved 10.2% year over year primarily due to higher contribution from the Aviation Services segment. In fiscal 2016, Aviation Services sales were up 8.3% due to strong growth over the last three quarters. The company expects this segment to continue to benefit from its strong position in the growing global aviation market (read more: AAR Corp Q4 Earnings Miss Estimates, Revenues Lag).

2.    Lockheed Martin Corp.’s Mission Systems and Training unit secured a contract worth $166 million from the Special Operations Command, FL. Per the deal, the unit will design, develop, test and produce dry combat submersible system to support the army’s activities. The majority of the work will be performed in Riviera Beach, FL and the UK and is expected to be complete by 2021.

LONGBOW Limited Liability Company, a joint venture between Lockheed Martin and Northrop Grumman Corporation, was awarded a contract by the U.S. Army for LONGBOW Fire Control Radar upgrades in the Apache attack helicopter (read more: Lockheed Martin Wins 2 DoD Contracts worth $256M).

Meanwhile, as per media reports, Lockheed Martin stated that it’s now in the final stages of negotiation with the Pentagon for the next batches of F-35 fighter jets. Investors should note that Lockheed Martin’s Aeronautics division accounted for 34% of consolidated net sales in 2015. And, within the Aeronautics unit, the F-35 Lightning Joint Strike Fighter constituted 59% of the segment’s sales last year. Hence, potential deals will aid the company to generate revenues in the future.

3.    The Boeing Co. won a modification contract, worth $127.3 million, from the U.S. Air Force to continue providing sustainment services for the Presidential Aircraft Recapitalization (“PAR”) program phase 2 pre-milestone B. Contracting activity is the Air Force Life Cycle Management Center, Wright-Patterson Air Force Base, OH.

Boeing will perform risk reduction activities to deal with PAR sustainment requirements and costs other than those awarded initially on Jan 29, 2016 (read more: Boeing Wins $127M Air Force Contract for PAR Program).

4.    Orbital ATK, Inc. signed an agreement with Thales Alenia Space, a joint venture between Thales and Leonardo-Finmeccanica, for the supply of Pressurized Cargo Modules (‘PCM’).

Thales Alenia Space will provide nine additional PCMs to Orbital ATK for upcoming cargo resupply missions to the International Space Station (‘ISS’). These cargo modules have been designed to carry supplies and science experiments on Orbital ATK’s Cygnus spacecraft under the National Aeronautics and Space Administration’s (‘NASA’) Commercial Resupply Services (‘CRS’) contract (read more: Orbital ATK Places Order for 9 More PCMs for Cygnus).

5.    Raytheon Co. said last week that it expects continued sales of its Patriot air defense missile systems, citing strong interest among the 13 operator countries in adding a 360-degree AESA radar to their existing systems.

Wes Kremer, president of Raytheon's Integrated Defense Systems business, told Reuters at the Farnborough International Airshow that a growing interest in integrating a 360-degree active electronically scanned array radar to the Patriot Air Defense systems would lead to sales growth.

According to Thomas Kennedy, Raytheon’s chairman and chief executive, escalating conflicts between nations and the anxiety related to ballistic missile threats are spurring the demand for precision weapons and missile defense (read more: Raytheon's Patriot Missiles to See Sales Growth: Here's Why).

Performance

It was a mixed performance for the defense stocks in the past one week. In the last five trading sessions, Boeing surged the most followed by Textron Inc. (TXT - Free Report) .

The six-month picture shows only gains after weeks of mixed performances. L-3 Communications Holdings was in the leading position with almost 36% share price appreciation followed by Northrop Grumman Corp. (NOC - Free Report) .

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

0.62%

19.04%

BA

2.00%

5.85%

GD

-0.38%

10.69%

RTN

-0.23%

14.11%

NOC

0.15%

18.24%

COL

0.02%

0.21%

TXT

1.64%

5.95%

LLL

-0.25%

35.63%

What’s Next in the Defense World?

Textron will report its second-quarter 2016 results on Jul 22 before the opening bell. Rockwell Collins Inc. is slated to report its third-quarter fiscal 2016 numbers on Jul 25.

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