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Defense Stock Roundup: LMT, HON & UTX Beat Q3 Earnings; Rockwell to Buy B/E Aerospace

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Third-quarter earnings releases from the defense and aerospace space have been dominating headlines over the past five trading sessions. With most of the defense primes comfortably surpassing analysts’ estimates, major indices for the aerospace and defense sector ended in the green. While the S&P 500 Aerospace & Defense (Industry) Index rallied 2.66%, the Dow Jones U.S. Aerospace & Defense Index gained 2.12% last week.

The outlook for the aerospace and defense sector is also encouraging when compared to what we saw in Q2. Earnings for this sector are likely to be down 1.3% on 3.1% lower revenues, with decline projected for seven of the 16 Zacks sectors. When compared to the Q2 scorecard, companies witnessed 11.6% earnings decline on 8.9% lower revenues.

Among last week’s highlights, defense biggies Lockheed Martin Corp. (LMT - Free Report) , Honeywell International Inc. (HON - Free Report) , Rockwell Collins Inc. and United Technologies Corporation (UTX - Free Report) came up with earnings beats while Textron Inc. (TXT - Free Report) lagged expectations. Further, B/E Aerospace Inc.’s proposed buyout by Rockwell hogged the limelight.

(Read more: Defense Stock Roundup for Oct 20, 2016 here.)

Recap of the Week’s Most Important Stories

1. Diversified U.S. conglomerate Textron kick started the third-quarter 2016 earnings season for the aerospace and defense sector.

Both earnings from continuing operations and revenues missed the Zacks Consensus Estimate.Earnings were also down 3.2% year over year. On a brighter note, revenues increased 2.2% on account of higher contribution from Textron Aviation and Industrial. The company’s Bell segment continued its dismal performance, posting a 2.9% revenue decline.

Textron raised its 2016 earnings per share (EPS) guidance to the range of $2.65–$2.85 from the prior projection of $2.60–$2.80 (read more: Textron Misses on Q3 Earnings & Revenues, Ups View).

2. Honeywell International reported third-quarter earnings results, wherein its adjusted EPS surpassed both the Zacks Consensus Estimate and the year-ago figure by 4.4%.

Revenues also comfortably exceeded the Zacks Consensus Estimate as well as the year-ago quarter’s equivalent. The revenue upside was driven by higher sales at the company’s Home and Building Technologies and Performance Materials and Technologies businesses.

Based on favorable business conditions, the company revised its full-year earnings guidance. Earnings are now expected in the range of $6.60–$6.64 per share, up 8–9% year over year (read more: Honeywell Beats on Earnings in Q3, Tweaks Guidance).

3. Aviation electronics maker Rockwell Collins reported results for fourth-quarter fiscal 2016. The company’s adjusted EPS surpassed the Zacks Consensus Estimate by 0.6% and the year-ago quarter’s figure by 14.5%. Fiscal 2016 adjusted EPS was in line with the consensus mark.

However, both fourth quarter as well as fiscal 2016 revenues missed the Zacks Consensus Estimate. On a year-over-year basis, fiscal fourth-quarter revenues grew in low-single digits on account of higher sales at Government Systems and Information Management Services. Except for the Commercial Systems segment, all other segments witnessed top-line growth.

The company has issued its fiscal 2017 revenue guidance in the range of $5.3–$5.4 billion and cash flow from operations in the band of $600−$700 million (read more: Rockwell Collins Tops Q4 Earnings, Gives FY17 View).

4. United Technologies maintained its earnings streak in third-quarter 2016 withadjusted income per share from continuing operations comfortably beating the Zacks Consensus Estimate. On a year-over-year basis as well, the income per share figure reflected an improvement, buoyed by organic sales growth and robust performance by the company’s aerospace businesses.

Net sales increased substantially from the year-ago quarter’s number but missed the Zacks Consensus Estimate. The upside in revenues was primarily attributable to improved performances across all segments, except for Otis.

For 2016, the company now expects adjusted earnings in the range of $6.55–$6.60 per share (prior guidance: $6.45 to $6.60) on revenues of $57–$58 billion (read more: United Technologies Beats Q3 Earnings, Raises View).

5. Pentagon’s largest defense contractor Lockheed Martin also released third-quarter 2016 earnings results. The company’s EPS as well as revenues comfortably surpassed the Zacks Consensus Estimate. Earnings also improved year over year on account of strong revenue and operating margin growth.

The upside in revenues was driven by strong segment sales; except for Missiles and Fire Control. Further, the company increased its ownership interest in the AWE Management Limited (AWE) venture by 18% during the reported quarter.

Meanwhile, management raised its earnings guidance to $12.10 from the previous $11.15–$11.45 after adjusting for the divestiture of IS&GS segment (read more: Lockheed Martin Tops Q3 Earnings, Sales; '16 View Up).

6. Meanwhile, Rockwell Collins announced the signing of a definitive contract to acquire B/E Aerospace. Per the agreement, Rockwell Collins will pay around $6.4 billion in cash and stock, in addition to the assumption of $1.9 billion in net debt.

Once completed, existing B/E Aerospace shareholders will hold approximately 20% of the merged company.Upon completion, Rockwell Collins is projected to maintain a strong investment grade credit rating with net debt of around $7.5 billion.The combined five-year free cash flow generation from the agreement is expected to exceed $6 billion.

Once completed, the deal will increase the sales of Rockwell Collins’ equipment, in the bigger two-aisle planes of The Boeing Company (BA - Free Report) and Airbus Group SE that serve international routes, by almost three times.It is expected to generate run-rate pre-tax cost synergy of roughly $125 million after tax (read more: Rockwell Collins to Purchase B/E Aerospace for $8.3B).

Herein, we would also like to remind investors that B/E Aerospace released its third-quarter 2016 numbers on the very same day as Rockwell Collins. B/E Aerospace’s earnings as well as revenues comfortably surpassed the Zacks Consensus Estimate.

Earnings increased double digits on a year-over-year basis. Revenues increased single digits driven by organic revenue growth at the company’s commercial aircraft segment. Management raised its 2016 earnings guidance to $3.28 per share, on account of solid third-quarter results.

Last Week’s Performance

The major defense stocks put up a strong show last week, except for Rockwell Collins and L-3 Communications Holdings, Inc. (LLL - Free Report) . In the last five trading sessions, Lockheed Martin gained the maximum at 7.28%, followed by Textron.

A similar picture can be seen over the past six months wherein most stocks in this sector scored high returns, except for Rockwell Collins and Textron. L-3 Communications recorded the highest 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.

CompanyLast WeekLast 6 Months
LMT7.28%7.37%
BA2.09%4.34%
GD0.77%15.00%
RTN1.71%9.00%
NOC0.63%7.84%
COL-4.72%-10.86%
TXT2.73%-1.56%
LLL-0.15%18.51%

What’s Next in the Defense Sector?

L-3 Communications and Raytheon are set to release third-quarter 2016 financial results before the market opens on Oct 27.

Harris Corporation (HRS - Free Report) is slated to report third quarter 2016 results on Nov 1, before the market opens. The company is also set to hold its annual meeting of shareholders on Oct 28, at the Harris Global Innovation Center, Melbourne, FL.

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