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Defense Stock Roundup: Boeing, Lockheed Score Big Wins, AAR Corp. and Others Make a Mark

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On Mar 16, President Trump unveiled the Pentagon's fiscal 2018 (FY 2018) budget proposal, which requested $639 billion in funding, an increase of $52 billion from the 2017 level. It includes $574 billion for the base budget, a 10% increase from the 2017 annualized CR level, and $65 billion for Overseas Contingency Operations. No doubt this reflects a significant boost to the growth of the defense biggies, in the days ahead.
 
But it seems that the President’s proposal to increase the defense budget, which initially led to an increase in defense stocks, has lost its charm a little bit now. Moreover, some analysts have expressed their doubt regarding the accuracy of the budget numbers forwarded by the DoD. These factors along with mixed performance at the bourses likely weighed on defense stocks.

As a result, major indices for the Aerospace-Defense industry ended up in the red in the trailing five trading sessions. While the S&P 500 Aerospace & Defense (Industry) Index lost 1.6%, the Dow Jones U.S. Aerospace & Defense Index declined 1.7% during this period. Nevertheless, a generous flow of funds from the Pentagon continued to boost the sector.

Among last week’s highlights, defense majors Boeing Co. (BA - Free Report) , Lockheed Martin Corp. (LMT - Free Report) , AAR Corp. (AIR - Free Report) , General Dynamics Corp. (GD - Free Report) and Rockwell Collins, Inc. secured a number of orders from the Department of Defense’s (“DoD”) daily funding session.

(Read Defense Stock Roundup for Mar 24, 2017 here)

Recap of the Week’s Most Important Stories

1. Boeing has won a $2.2 billion modification contract for the production and delivery of 17 Lot 8 full-rate production P-8A aircraft, which includes 11 for the Navy, two for foreign military sales (FMS), and four for cooperative agreement partners. The contract also includes production and delivery of long lead parts related to the production of 10 Lot 9 P-8A aircraft – seven for the Navy and three for FMS partners.

Per the modification, Boeing will also provide services for Lot 8 distinguishable efforts comprising unidentified obsolescence, class I change assessment, obsolescence monitoring, and integrated baseline/program management reviews.

This contract includes 65.9% of the purchases for the Navy; 21.7% for cooperative agreement partners; and 12.4% for FMS partners.

The contract was awarded by the Naval Air Systems Command, Patuxent River, MD. Work is scheduled to be completed by Dec 2020. The company will execute the majority of the work in Seattle, WA; while the rest will be carried out at various locations across the U.S.  It will use fiscal 2017 aircraft procurement (Navy), cooperative agreement, and foreign military sales funds.

Boeing currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

2. Lockheed Martin won a $1.6 billion modification contract to produce and deploy the Counter Fire Target Acquisition Radar System. It was awarded by the U.S. Army Contracting Command, Aberdeen Proving Ground, MD. Work is scheduled to be completed by Mar 29, 2022.

Again, Lockheed Martin’s Missiles and Fire Control (MFC) business unit secured a contract for supplying the 9th Lot of Terminal High Altitude Area Defense (THAAD) interceptors to the U.S. Missile Defense Agency. The company expects to complete work under this deal by Mar 31, 2020. Valued at $273.5 million, the contract was awarded by the Missile Defense Agency, Huntsville, AL.

Per the terms of the agreement, Lockheed Martin will produce the 9th Lot of interceptors and one-shot devices in addition to providing associated production support. Work related to the contract will be carried out in Dallas, TX; Camden, AK; Huntsville, Anniston and Troy, AL. The company plans to utilize fiscal 2017 procurement funds to finance this deal. (Read more: Lockheed Martin Wins $273.5M THAAD Interceptor Deal)

Apart from the contract wins, more positive news flowed in for Lockheed Martin in terms of the Bahrain deal, which had been stalled owing to human rights concerns last year. Recently, Trump’s administration unveiled its plans to pursue the $5.0 billion sale of 19 Lockheed Martin’s F-16 jets to Bahrain. As told to Congress, the U.S. State Department will reinstate the deal, putting aside the human rights conditions imposed by the Obama government.

Though the Bahrain deal has crossed the primary hurdle, the entire process involves a lot many stages. For final approval, this deal needs to undergo extensive congressional review for which the State Department has sent a notice to Congress and the review time is 40 days. Next, a formal notice needs to be served to Congress as required by the Arms Export Control Act. Only after this, the licenses for the sale will get approved. The Bahrain deal is sure to benefit Lockheed Martin substantially. (Read more: Trump Admin to Pursue Lockheed's F-16 Jet Sale to Bahrain)

Lockheed Martin currently carries a Zacks Rank #3.

3. AAR Corp.’s business unit, AAR Supply Chain Inc., has won a supply chain management contract from the U.S. Air Force for the Landing Gear Performance Based Logistics One program. The contract is valued at $909.4 million. It was awarded by the Air Force Sustainment Center, Hill Air Force Base, UT.

Per the terms of the contract, AAR Supply Chain will provide services that include purchasing, remanufacturing, distribution and inventory control to the Air Force depot and field-level, foreign military sales of C-130, KC-135 and E-3 landing gear parts. Work is scheduled to be completed by Mar 31, 2032 and will be carried out in Wood Dale, IL; Miami, FL; and Ogden, UT. (Read more: AAR Corp Unit Secures $909M Contract from Air Force)

AAR currently carries a Zacks Rank #4 (Sell).

4. General Dynamics’ business unit, General Dynamics Ordnance and Tactical Systems Inc., has won a contract worth $221.0 million from the U.S. Army for the procurement of M2 flexible, M2 fixed, and M2A1 machineguns. It was awarded by the U.S. Army Contracting Command, Picatinny Arsenal, NJ. Work is scheduled to be completed by Mar 30, 2023.

General Dynamics carries a Zacks Rank #4.

5. Rockwell Collins secured a contract from the U.S. Navy for the procurement of the Tactical Combat Training System Increment II (TCTS Inc II) for environment improvement of air combat training with rangeless air combat. The TCTS Inc II program will also secure air-to-air and air-to-ground data link.

Valued at $142.4 million, the contract was awarded by the Naval Air Warfare Center Training Systems Division, Orlando, FL. The majority of the work related to this deal will be executed in Cedar Rapids, IA; and the rest in Fort Walton Beach, FL; Richardson, TX; and various other locations within the continental U.S.

Per the terms of the agreement, Rockwell Collins will also procure participant subsystems, ground subsystems, remote range units, peculiar support equipment, platform interfaces, an internal rack-mounted subsystem capability for fixed wing and rotary aircraft and an internal subsystem for the Joint Strike Fighter. The company expects to complete work under the deal by Nov 2022. (Read more: Rockwell Collins Wins $142M Navy Deal for TCTS Inc II)

Rockwell Collins holds a Zacks Rank #3.

Performance

The major defense stocks put up a mixed performance over the past five trading sessions. While Lockheed Martin gained 16.26%, other defense giants like General Dynamics, L3 Technologies, Inc. lost more than 0.5% in the same time frame.

Over the past six months, all the industry majors delivered a stellar performance. Notably, Boeing gained the most with its stock rallying 34.45%, 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.



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