Defense Stock Roundup: Boeing Strikes Deal with Alcoa, Wins Defense Contacts; Northrop to Boost its RQ-4 Global Hawk Fleet
Over the last five trading sessions, defense biggies received significant deals in an otherwise anemic budget environment. Among last week’s important updates, The Boeing Co. (BA) has been able to snag a few defense deals. Also making it to the headlines over the last five trading sessions was Northrop Grumman Corp. (NOC), receiving fund for expanding its RQ-4 Global Hawk unmanned aircraft system fleet.
(Read the last recap here: Defense Stock Roundup for Sep 9, 2014.)
Iraq Update
As part of the planned expanded mission against Islamic State militants announced by President Obama last week, the U.S. military conducted its first airstrike in south-west Baghdad. The Pentagon also revealed plans about the deployment of approximately 475 additional service members to Iraq to fight Islamic extremists in the country as announced by Obama on the eve of the 9/11 attacks. The president vowed to reduce and ultimately destroy the Islamic State of Iraq and the Levant (ISIL).
Last week Obama announced the expanded campaign, pledging to help drive the Islamic State militants out of Iraq and to strike them in Syria as well. Obama is expected to begin with conducted airstrikes in Iraq to protect U.S. interests and personnel, while assisting Iraqi refugees as well as securing significant infrastructure. The U.S. fighter planes have conducted more than 160 airstrikes across Iraq since August.
With the U.S. administration’s pledge to engage in a long-term and more proactive intervention in Iraq, the defense stocks might see some gains going ahead.
Recap of the Week’s Most Important Stories
1. The Boeing Co. has struck a $1 billion deal with the aluminum giant Alcoa Inc., under which the latter will supply aluminum sheet and plate products to the former. The contract is the largest ever between the two companies. With this deal, Alcoa becomes Boeing’s sole supplier of wing skins on all of its metallic structure airplanes.
This defense giant also secured a few awards from the Pentagon’s funding list. The company won a $293.2 million contract for performance-based support used across supported platforms. The original contact has a five-year base period with one five-year option. This fixed-price-incentive, requirements-type contract has a performance completion date of Sep 19, 2019. Boeing also won a $130 million modification contract to build seven new Apache AH-64E helicopters.
2. Northrop Grumman Corp. also got a slice of the U.S. defense department’s funding allocation last week. The company received a $354 million contract from the U.S. Air Force to expand its RQ-4 Global Hawk unmanned aircraft system fleet by three aircraft and also to bring in additional multi-intelligence capability.
Northrop Grumman is to furnish retrofit kits to add Airborne Signals Intelligence Payload (:ASIP) sensors to two existing RQ-4s. This will bring the Air Force’s RQ-4 fleet size to 37 in 2017, while the ASIP retrofit kits are slated for delivery in late 2016 and 2017.
3. General Dynamics Corp.’s (GD) unit Electric Boat received an award worth $234.2 million from the U.S. Navy for support of active nuclear submarines. The company is one of the two contractors equipped to build nuclear-powered submarines in the U.S. (read more: General Dynamics Electric Boat Wins $234.2M Navy Contract).
4. Sikorsky Aircraft Corp. – a unit of United Technologies – won a $203.6 million order from the U.S. Army for 18 UH-60M Blackhawk helicopters for the Mexican Air Force under the foreign military sales program. Estimated completion date is May 30, 2016.
5. Defense prime Lockheed Martin Corp.’s (LMT) business unit Mission Systems and Training won a U.S. Navy contract for low rate initial production and fielding of Surface Electronic Warfare Improvement Program (:SEWIP) Block 2 systems (read more: Lockheed Secures US Navy's Electronic Warfare Contract).
Meanwhile, Pratt & Whitney − the engine manufacturer of Lockheed Martin’s F-35 Joint Strike Fighter (:JSF) and a unit of United Technologies – stated that its contracts with the DoD for the next two batches of engines for the F-35 fighter jet will result in combined cost savings of 7% to 8%. Pratt & Whitney stated that it had already cut costs of its F-35 engine by over 50%.
Lockheed Martin’s F-35 JSF is the most pricey weapons system in U.S. history and has a potential price tag of $400 billion to $1 trillion. Its development has been marked by cost overruns, schedule delays and technical problems.
Performance
The share prices of the defense biggies have been sluggish given the budget constraints. In the past five days, the market reaction has been more or less mixed. Most of the big defense stocks have nonetheless closed in the green over the last five days, except for Boeing, Rockwell Collins (COL) and Textron Inc. (TXT). The biggest gainer was L-3 Communications Holdings Inc. (LLL) with Raytheon Co. (RTN) close at its heels, while Textron’s share price dropped the most.
In the past six months, although a few defense companies like Lockheed Martin, Boeing, General Dynamics, Raytheon and Northrop Grumman have reported in the green, other behemoths like Rockwell Collins, Textron and L-3 Communications Holdings were in negative territory. General Dynamics is the sole defense stock to have gained in the double digits over the six-month time frame.
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 | +0.18% | +7.03% |
BA | -1.34% | +0.71% |
GD | +0.67% | +17.01% |
RTN | +2.47% | +0.54% |
NOC | +1.90% | +6.58% |
COL | -0.13% | -4.67% |
TXT | -4.49% | -5.31% |
LLL | +2.63% | -1.06% |
What’s Next in the Defense World?
On Sep 16, 2014, Boeing will attend the Morgan Stanley Laguna conference.
On Sep 23, 2014, Rockwell Collins will attend the Citi 2014 Industrials conference.
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