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Defense Stock Roundup: Lockheed Martin Wins $10B Deal; Boeing, Raytheon Dominate Headlines

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As speculations surrounding an interest rate hike in the coming months are gaining steam, the U.S. stocks overall closed lower on Aug 19, following the Fed meeting minutes on Aug 17.

Meanwhile, defense primes witnessed mixed movements last week. The S&P 500 Aerospace & Defense (Industry) index and Dow Jones U.S. Aerospace & Defense Index saw measly gains of 0.02% and 0.2%, respectively, in the last five trading sessions.

Among the highlights, Pentagon’s prime contractor Lockheed Martin Corp. LMT stole the limelight, securing a major $10 billion order from the Department of Defense’s (“DoD”) daily funding session. The Boeing Co. BA clinched the much anticipated contract form the U.S. Air Force for the first lot of 19 KC-46 Pegasus aerial tankers.

(Read Defense Stock Roundup for Aug 16, 2016 here.)

AEROSPACE/DEFENSE Industry Price Index

AEROSPACE/DEFENSE Industry Price Index

Recap of the Week’s Most Important Stories

1.    Lockheed Martin received a major $10 billion contract from the U.S Air Force to cover all future delivery orders of C-130J Super Hercules aircraft.

This contract covers all future delivery orders within its scope. The award will support the C-130J production program and work under this contract is slated for completion by Aug 18, 2026. This contract also involves foreign military sales.

The latest model in Lockheed Martin’s Hercules family – C-130J Super Hercules – is a four-engine turboprop military transport aircraft. Approximately 16 countries operate C-130J Super Hercules (read more: Lockheed Martin Clinches $10B Super Hercules Deal).

Again, Lockheed Martin’s business unit, Mission Systems and Training, has won a modification contract from the U.S. Navy for Aegis Weapon System MK-7. The deal is valued at $490.6 million. Per the contract, Lockheed Martin will manufacture MK-7 ship sets and related spares, provide engineering efforts and support equipment, along with efforts to support production, system testing, shipyard installation and associated requirements.

The latest modification contract includes purchases for the Navy of about 16%, 32% for the Government of Japan and 52% for the government of the Republic of Korea under the foreign military sales (FMS) program (read more: Lockheed Wins $491M Deal for Aegis Weapon System).

2.    In a separate business development, Lockheed Martin has completed the spin-off of its Information Systems & Global Solutions (“IS&GS”) business segment and combined it with a Leidos Holdings, Inc. (LDOS) subsidiary. The spin-off was announced this January using a tax-efficient Reverse Morris Trust transaction.

With the latest spin-off, Lockheed has concluded the portfolio reshaping initiative undertaken in 2015 and in the process, made Leidos the largest IT provider in the federal market.

The transaction is valued at $4.6 billion. It includes a cash payment of $1.8 billion to Lockheed Martin and Leidos stock worth $2.8 billion to shareholders (read more: Lockheed Merges IT Business with Leidos Subsidiary).

3.    Boeing clinched the much anticipated $2.8 billion contract form the U.S. Air Force for the first lot of 19 KC-46 Pegasus aerial tankers. Recently, the Air Force won permission from the Pentagon to sign two production contracts with Boeing.

The contract includes the first two production batches of seven and 12 aircraft as well as spare parts. Boeing expects to build a total of 179 of the 767-based refueling aircraft including the future options. The Air Force will use KC-46 to replace its fleet of KC-135 tankers.

The wide-bodied KC-46 Pegasus is a multirole tanker that can refuel all U.S., allied and coalition military aircraft compatible with international aerial refueling procedures, according to the company. Boeing will start delivering tankers to the Air Force in 2017 (read more: Boeing Wins $2.8B Air Force Contract for KC-46 Tankers).

Meanwhile, the U.S. Air Force awarded Boeing a $254.2 million worth of contract for stability testing on its aging fleet of F-15 C/E combat aircraft. The contract covers testing, repairs and analysis and other stability checks to assess the ramifications of flying F-15 aircraft beyond the original design service life over the next five years, according to the DoD.

Work is expected to be completed by Aug 31, 2021. This contract includes a one-year base with four one-year ordering periods.

First introduced in 1978, the F-15C Eagle jet reached initial operational capability for the U.S. Air Force in Sep 1975. As per the U.S. defense industry published reports, about 670 F-15s remain in the U.S. Air Force’s inventory.

4.    Raytheon Company RTN received a subcontract valued $104 million to upgrade the ground segment for the U.S. Air Force RQ-4 Global Hawk autonomous aircraft. Raytheon joined Northrop Grumman Corp. (NOC) as the ground integrator for Global Hawk contracts.

The maker of Global Hawk, Northrop Grumman provides the U.S. Air Force high-altitude, long-endurance platform used to gather a variety of intelligence, surveillance and reconnaissance, or ISR, data. Raytheon, on the other hand, provides upgraded version of ground controls to modernize capabilities, safety and cybersecurity of Global Hawk operations worldwide.

Separately, Raytheon’s business unit, Integrated Defense Systems (“IDS”), has won a 42-month engineering and manufacturing development (EMD) contract from the U.S. Navy for the Enterprise Air Surveillance Radar (EASR). Two configuration variants will be included in the EASR — a rotating phased array and a three-face fixed-phased array.

The contract is valued at $92.1 million. It includes options which could increase the cumulative value to $723.1 million, if exercised. Contracting activity is the Naval Sea Systems Command, Washington Navy Yard, District of Columbia (read more: Raytheon Secures $92M Navy Contract for 2 EASR Variants).

Again, Raytheon is set to manufacture launchers for the Kongsberg Naval Strike Missile or NSM at its Louisville facility. The company builds Close-in Weapon Systems including Phalanx, SeaRAM and Rolling Airframe Missile launchers at the plant. This contract closely follows Raytheon’s deal with Kongsberg to construct NSM launchers in Tucson, AZ.

The contract also entails the final assembly, integration and testing of the NSM launchers at Raytheon's Tucson facility.

NSM launcher is an anti-ship missile with a range of over 100 nautical miles. It has a greater capability to strike land and sea targets (read more: Raytheon to Manufacture NSM Launchers at Louisville Plant).

Performance

Defense companies ended last week on a mixed note, after a positive momentum in recent times. In the last five trading sessions, Textron Inc. (TXT - Free Report) gained the most with over 1% share price appreciation, while Lockheed Martin lost the maximum at 1%.

The six-month picture also shows only gains for major defense stocks barring Rockwell Collins Inc. COL. L-3 Communications Holdings LLL maintained its leading position with almost 27% share price appreciation followed by Textron.

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

-1.00%

18.15%

BA

-0.01%

15.47%

GD

-0.12%

12.00%

RTN

1.02%

13.92%

NOC

0.53%

14.09%

COL

0.77%

-4.46%

TXT

1.44%

20.33%

LLL

0.54%

26.45%

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