Despite a generous flow of funds from the Pentagon, mixed performance on the bourse kept the major indices of the aerospace and defense sector in the red over the past five trading sessions. The S&P 500 Aerospace & Defense (Industry) index dropped 3.5%, while the Dow Jones U.S. Aerospace & Defense Index was down 0.6% during this time frame.
Honeywell International Inc.’s (HON - Analyst Report) lowered guidance was perhaps the biggest contributor to the sector’s underperformance. However, defense majors like BAE Systems plc (BAESY - Snapshot Report) , General Dynamic Corp. (GD - Analyst Report) and Lockheed Martin Corp. (LMT - Analyst Report) grabbed a number of major contracts.
(Read Defense Stock Roundup for Oct 4, 2016 here.)
Recap of the Week’s Most Important Stories
1. Honeywell International lowered its guidance for third-quarter 2016 (ended Sep 30) as well as the full year, with only a fortnight to its earnings release. This diversified industrial conglomerate manufactures a wide range of aerospace products for the general aviation industry as well as military and space operations. Investors reacted negatively to this unexpected guidance cut, causing a high single-digit sell-off in the stock.
The latest guidance reflects the impact of the separation of the company’s Automation and Control Solutions business into two new segments, the Aug 29 acquisition of Intelligrated, the Sep 16 sale of the Honeywell Technology Solutions (HTSI) government services unit, as well as a dismal outlook for certain business segments.
The company now expects third-quarter earnings to be around $1.60 per share, down from the earlier guidance of $1.67–$1.72. The trimmed outlook is a result of lower shipments to Business and General Aviation OEMs, program delays in the domestic and international businesses of Defense & Space, and a decline in volumes at Productivity Solutions.
For 2016, management now projects earnings in the range of $6.60–$6.64 per share, compared to the previous expectation of $6.60–$6.70. Also, organic sales are now expected to dip 1–2%. (Read more: Honeywell Revises Guidance Prior to Third Quarter Release)
2. BAE Systems Information and Electronic Systems Integration Inc., a unit of BAE Systems plc, has been awarded a $618.3 million contract for the procurement of the Advanced Precision Kill Weapon System II rockets. The advanced weapon system will serve the U.S. military in addition to the governments of Iraq, Lebanon, Netherlands, Jordan and Australia.
Work for this contract, which was awarded by the Naval Air Systems Command, Patuxent River, MD, is scheduled to be complete by Dec 2018. Notably, the Advanced Precision Kill Weapon System (APKWS) rocket, a highly cost-effective solution that utilizes the military’s existing infrastructure and inventory, is the only U.S. Department of Defense fully qualified guided 2.75-inch rocket.
The rocket boasts a successful hit rate of 93% and a low-cost surgical strike capability. The contract is expected to ramp up the defense capabilities of the U.S. government and its allies.
3. Defense behemoth General Dynamics’ Land Systems unit secured a contract worth $508.7 million for upgrading 215 Stryker armored troop transport vehicles from the standard flat-bottom hull configuration to the double-V underside hull. With the latest upgrade, the Styker vehicles are expected to better deflect improvised explosive devices.
The contract also covers the restoration of mobility and increasing compatibility of the Stryker vehicles with future Army network components. Work for the contract, which was awarded by the Army Contracting Command, Warren, MI, is scheduled to be over by Apr 30, 2019.
Meanwhile, General Dynamics’ National Steel and Shipbuilding Co. (NASSCO) business division secured a modification contract worth $106.2 million from the U.S. Navy. The deal aims at procuring additional long lead-time material, engineering and non-production support for the Expeditionary Mobile Base 5 (ESB 5). The ESB 5 is a highly flexible ship that offers logistics movement from sea to shore and supports a broad range of military operations.
Per the terms of the agreement, NASSCO will procure whole ship sets, including interior outfittings; steel plates; hull and piping, ventilation and machinery insulation; heating, ventilation and air conditioning; emergency switchboards; piping; valves; steel shapes; ballast water treatment system; Aqueous Film Forming Foam system; and knuckle-boom crane.
Currently, the ESB forms the centerpiece of the Navy’s forward-deployed airborne mine countermeasures mission (AMCM). Being one of the only two contractors in the world equipped to build nuclear-powered submarines, General Dynamics enjoys a dominant position in the Navy. (Read more: General Dynamics Clinches a New $106M Contract for ESB 5)
The company’s Electric Boat Corp. also clinched a modification contract worth $101.3 million from the Navy for the manufacture of 22 tactical missile tubes. Per the terms of the contract, the tactical missile tubes will support the development of the Common Missile Compartment for the Navy's Ohio Replacement submarine and the UK’s Successor-class ballistic-missile submarine.
The original five-year contract, awarded in Dec 2012 and valued at $1.85 billion, required Electric Boat to conduct research and development work for the Navy's next-generation ballistic-missile submarine. Construction for this submarine is scheduled to begin in 2021. The potential value of the overall contract is $2.5 billion (Read more: General Dynamics Wins $101M Navy Deal for Missile Tubes).
4. Pentagon’s prime defense contractor, Lockheed Martin secured quite a few contracts last week. The biggest contract in terms of value, worth $214.5 million, was awarded to the Mission Systems and Training unit by the U.S. Navy, for offering services for up to 400 Consolidated Automated Support System (“CASS”) stations and 150 reconfigurable transportable CASS stations.
It includes service purchases of about 88.5% for the Navy and Marine Corps, 4% for Kuwait, 3% Australia, 1.5% for Malaysia, and 1% each for Finland, Spain and Italy, under the foreign military sales program.
Notably, the CASS, developed by the Naval Air Systems Command (“NAVAIR”), is the Navy's original station in the CASS standard automatic test equipment family. Lockheed Martin is the largest U.S. defense contractor which focuses on providing reliable, capable avionics support related to the CASS. (Read more: Lockheed Unit Wins $215M Deal for CASS Support Services)
Lockheed’s Mission Systems and Training unit won a second contract worth $148.9 million from the Navy to continue making technological advancements in its electronic warfare portfolio in order to keep warfighters updated.
Per the contract, Lockheed Martin will produce the Surface Electronic Warfare Improvement Program ("SEWIP") Block 2 systems. It includes options for another four years for upgrading the fleet's electronic warfare capabilities so as to ensure that the warfighters can counter evolving threats. SEWIP Block 2 is the latest version of the "blocks" that the Navy is pursuing for its shipboard electronic warfare system. (Read more: Lockheed Martin Wins Navy Deal for SEWIP Block 2)
5. Defense prime Northrop Grumman Corp.’s (NOC - Analyst Report) Technology Services business division secured a couple of modification contracts from the U.S. Air Force with a combined value of $96.4 million. Both the contracts involve providing support for the KC-10 program. KC-10 is The Boeing Company’s (BA - Analyst Report) aerial refueling tanker aircraft.
The first contract, involving the delivery of 12 engine overhauls related to the KC-10 program, is valued at $54.1 million.Under the terms of the second contract, worth $42.3 million, Northrop will deliver contractor logistics support for aircraft and spares involving the KC-10 program. Northrop Grumman provides 24/7 global logistics support for the KC-10 Extender fleet of 59 aircraft, which supports worldwide operations in dual capacity as a tanker and cargo transport. (Read more: Northrop Grumman Secures Two Air Force Deals Worth $96M)
Last Week’s Performance
The major defense stocks put up a weak show last week, with most of them losing around 1% or even more, except Northrop. Textron Inc. (TXT - Analyst Report) was the biggest loser, recording a 4.3% drop in its share price, while L-3 Communications Holdings Inc. (LLL - Analyst Report) witnessed the smallest decline.
However, over the past six months, most of the stocks in this sector have been on the rise, except Rockwell Collins Inc. (COL - Analyst Report) . L-3 Communications has the maximum gain, followed by General Dynamics.
The following table shows the price movement of the major defense players over the past five trading days and the last six months.
|Company||Last Week||Last 6 Months|
What’s Next in the Defense Sector?
L-3 Communications will attend The European Forum in Warsaw, Poland, scheduled for Oct 9–13, to discuss Nuclear Science & Technology Issues, Opportunities & Challenges.
Rockwell Collins is gearing up for an exhibition of its latest innovations in avionics and networked mission communications, including the SimEye SXT50 II helmet mounted display system, at Japan Aerospace 2016, scheduled for Oct 12–15, at the Tokyo International Exhibition Center. SX50T II is a high-performance helmet-mounted display that simulates head-up display functions for aircraft trainers on fixed and rotary-wing aircraft.
Looking for Ideas with Even Greater Upside?
Today's investment ideas are short-term, directly based on our proven 1 to 3 month indicator. In addition, I invite you to consider our long-term opportunities. These rare trades look to start fast with strong Zacks Ranks, but carry through with double and triple-digit profit potential. Starting now, you can look inside our home run, value, and stocks under $10 portfolios, plus more.Click here for a peek at this private information >>