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Defense Stock Roundup: Denuclearization, NOC-OA Merger, Deals Wins for BA & LMT

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The play of mixed factors has kept U.S. defense stocks afloat in the five trailing trading sessions, with limited upside in sight. While a generous flow of funds from the Pentagon and completion of the mega merger between Northrop Grumman and Orbital ATK boosted the U.S. aerospace and defense industry, the denuclearization deal at Singapore’s summit marred the expected growth rate.

In particular, shares of major U.S. defense contractors declined on Jun 12 following a conflict-free settlement of the denuclearization deal. Consequently, major indices of the Aerospace-Defense space — the S&P 500 Aerospace & Defense (Industry) index and the Dow Jones U.S. Aerospace & Defense index — inched up 0.6% in the last five trading sessions.

Moreover, defense majors like The Boeing Company (BA - Free Report) , Lockheed Martin Corp. (LMT - Free Report) , Northrop Grumman Corp. (NOC - Free Report) and General Dynamics Corp. (GD - Free Report) secured a few orders from the Department of Defense’s daily funding session. Also, Northrop Grumman’s Orbital ATK acquisition for $9.2 billion hit the headlines last week.

Recap of Last Week’s Key Stories

1. Boeing secured an $862.2 million modification contract for providing full-rate production of fifteen Lot 42 F/A-18E and three F/A-18F aircraft to the U.S Navy. The contract was awarded by the Naval Air Systems Command, Patuxent River, Maryland.

Majority of the work will be carried out in El Segundo, CA, St. Louis, MI and the rest would be performed in various locations across the United States. Work related to the deal is expected to be completed in June 2020 (read more: Boeing Wins $862M Navy Deal for the F/A 18 Aircraft).

2. Lockheed Martin’s Aeronautics division won a $735.7 million modification contract to support the F-35 Lightning II program. The contract was awarded by the Naval Air Systems Command, Patuxent River, MI.

Per the deal, Lockheed Martin will provide material and equipment for the low rate initial production (LRIP) of the 13th and 14th lots of F-35 jets after the completion of formal hardware qualification testing.

The modification includes 49% of the work for the U.S. Air Force, 26% for the U.S. Navy and 25% for the U.S. Marine Corps. Majority of work related to the deal will be performed in Fort Worth, TX; El Segundo, CA, and Warton, the U.K. It is expected to be over by December 2019 (read more: Lockheed Martin Wins $736M Deal to Modify F-35 Jets).

3. Northrop Grumman’s subsidiary, Northrop Grumman Systems Corp., clinched a $153.2-million modification contract for the delivery of a single E-2D Advanced Hawkeye Aircraft for the government of Japan. The contract was awarded by the Naval Air Systems Command, Patuxent River, MI.

Work related to the deal will be performed in St. Augustine, FL; Syracuse, NY; Melbourne, FL; Indianapolis, IN; Aire-sur-l'Adour, France and various other locations across the United States. It is expected to complete in March 2020 (read more: Northrop Grumman Wins $153M Hawkeye Aircraft Deal From Japan).

Meanwhile, Northrop Grumman announced the completion of its Orbital ATK acquisition for a total value of $9.2 billion. Interestingly, the news surfaced a day post the U.S. Federal Trade Commission (FTC) gave the final go-ahead to the deal’s closure, subject to a few conditions.

In line with the FTC’s announcement, post acquisition, Orbital ATK has become Northrop Grumman’s fourth business unit under the name of Innovation Systems.

The buyout is expected to be accretive to earnings per share for the first full year after the acquisition. In addition, it is estimated to generate an annual cost savings of $150 million by 2020 (read more: Northrop Grumman Completes Orbital ATK Takeover for $9.2B).

4. General Dynamics’ business unit, Bath Iron Works (BIW), recently secured a contract for providing lead yard services (LYS) to DDG-51 class ships. Work related to the deal is scheduled to be over by June 2019.

Valued at $50 million, the contract has been awarded by the Naval Sea Systems Command, Washington, DC. However, options included in this deal, if exercised, will increase the cumulative value of the agreement to $304.8 million.

Majority of the work related to this deal will be performed in Bath, ME. General Dynamics will use fiscal 2014, 2016 and 2017 shipbuilding and conversion (Navy) fund for completing the task (read more: General Dynamics Wins Navy Deal to Aid DDG-51 Class Ships).

Performance

Over the last five trading sessions, the defense biggies put up a mixed show. While Boeing gained the most with a 2.9% increase in its share price, Raytheon lost the most with a 3.1% drop in the same.

However, over the last six months, the entire industry has put up a stellar performance, except Lockheed Martin. Keeping up with its usual trend, Boeing once again gained the most, with its shares surging 27% 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.

CompanyLast WeekLast 6 Months
LMT-1.48%-0.23%
BA2.92%26.99%
GD-1.49%1.18%
RTN-3.12%10.55%
NOC0.05%7.18%
COL0.56%2.90%
TXT-0.34%24.79%
LLL0.60%3.73%

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