Defense Stock Roundup: Lockheed-MBDA Win German Contract; United Technologies to Exit Helicopter - Analyst Blog
Foreign military sales or FMS as it is generally known dominated the list of U.S. Department of Defense contracts last week. Germany has opted for MEADS, jointly developed by Lockheed Martin Corp. LMT and the European defense group MBDA. South Korea is the latest to turn to the U.S. to beef up its missile defense.
United Technologies Corp. UTX has announced that it will shed its Sikorsky Aircraft unit to better focus on its core operations. It also trimmed its full-year earnings expectation as a slowdown in oil and natural-gas activity weighed on its Sikorsky helicopter business ahead of the unit’s planned spin-off or sale.
(Read Defense Stock Roundup for Jun 9, 2015 here.)
Recap of the Week’s Most Important Stories
1. United Technologies has decided to separate its Sikorsky Aircraft subsidiary by the end of September in order to focus on its more profitable units. Earlier this year, the company had expressed that it was exploring options regarding Sikorsky.
But Monday, it ended the intense speculation by announcing its plan to sell Sikorsky or spin it off as a separate company. United Technologies also told attendees at an investor meeting at the Paris Air Show that a sale of Sikorsky would cut an estimated 10 cents per share off 2015 earnings, while a spin-off would cost 20 cents per share.
The company trimmed its 2015 adjusted per share guidance to a range of $6.35 to $6.55 from its prior projection of $6.85 to $7.05 to reflect the Sikorsky separation (read more: United Technologies Revises Guidance on Sikorsky Rethink).
2. Lockheed Martin and European defense group MBDA has been chosen by Germany for their jointly developed Medium Extended Air Defense System or MEADS for the country’s tactical air and missile defense, edging out competition from Raytheon’s Patriot system. The deal, worth around $4.5 billion, is expected to give a financial boost to Lockheed Martin's plant in suburban Syracuse, where the MEADS surveillance radar is manufactured.
MBDA is a business consortium that includes Italy's Finmeccanica SpA, Airbus Group and Britain's BAE Systems Plc. MEADS will replace Germany's existing Patriot air defense systems built by Raytheon.
In another business development, Pentagon’s prime contractor – Lockheed Martin – announced that it will add about 130 jobs by 2017 at Cape Canaveral, FL. The move is to support the U.S. Navy's Trident II D5 Fleet Ballistic Missile program, which is positioned aboard U.S. Navy Ohio-class and U.K. Royal Navy Vanguard-class submarines to prevent nuclear aggression. This addition reflects over 20% employment growth at the Cape Canaveral location from its current level of 500.
3. The U.S. defense sector is leaving no stone unturned to boost its top line internationally amid meek budget at home. The U.S. State Department has notified Congress that it has approved potential arms deals worth approximately $2.4 billion with South Korea and Lebanon.
South Korea is the latest to seek U.S. help to beef up its missile defense. The contract includes three Aegis Shipboard Combat Systems for Seoul valued at $1.91 billion. The contractors − Lockheed Martin, Raytheon Co. RTN and General Dynamics Corp. GD – would be the beneficiaries.
The department also approved a possible sale of six A-29 Super Tucano close air support planes accompanied with engines and related equipment, support and training to Lebanon. The deal is expected to be worth $462 million. Sierra Nevada Corp., BAE Systems Plc and Pratt & Whitney will be the primary contractors.
4. Boeing BA and the Qatar government signed an agreement for the purchase of four more C-17 Globemaster III strategic airlifters. These aircraft will join the Qatar Armed Forces' existing fleet of four, thereby doubling its current fleet. However, financial details of the transaction were not disclosed.
5. Raytheon announced that the U.S. government has authorized several U.S. allies and security partners to acquire Raytheon-made AN/TPY-2 ballistic missile defense radar via an FMS contract for use in forward-based mode. The terminal-mode AN/TPY-2 ballistic missile defense radar has already been approved for export as the fire control radar of the Terminal High Altitude Area Defense (THAAD) system.
Performance
Although the sector returned to the green after last week’s loses, the gains have been rather subdued. General Dynamics gained the most, followed by Textron Inc. TXT.
The picture in the past six-month period is mixed. Only Boeing, Northrop Grumman Corp. NOC, Rockwell Collins and Textron have been able to register double-digit gains. Raytheon and L-3 Communications on the other hand have failed to end in the green. Lockheed Martin and General Dynamics registered single-digit share price appreciation.
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 | 0.30% | 4.68% |
BA | 1.56% | 18.02% |
GD | 2.41% | 5.74% |
RTN | 0.35% | -1.82% |
NOC | 1.74% | 13.77% |
COL | 0.00% | 15.46% |
TXT | 2.20% | 14.84% |
LLL | 1.21% | -3.33% |
What’s Next in the Defense World?
In the next five days, no major developments are expected on the defense front. We note that defense stocks have been experiencing volatility with gains and losses in recent sessions and investors can expect this volatile movement to continue in the coming days as well.
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