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Defense Stock Roundup: BA's 737 Crash Drags Indices Down, NOC Scores Big

Zacks Equity Research
These companies aren't just beating on earnings, their stocks are also on fire, hitting new 5-year highs.

While the U.S. defense space witnessed a moderate flow of contracts from the Pentagon last week, the tragic crash of Boeing’s BA 737 Max 8 in Ethiopia provided a solid jolt to defense stocks’ performance. The aerospace giant’s decision to cut down production of its bestselling commercial jetliner dealt another blow to the U.S. defense industry.

Consequently, major indices of the aerospace and defense industry ended in the red during the trailing five trading sessions. S&P 500 Aerospace & Defense (Industry) and the Dow Jones U.S. Aerospace & Defense indices slipped 1.2% each in the aforementioned period.

Among last week’s highlights, defense majors Northrop Grumman NOC and Lockheed Martin LMT secured a handful of notable deals from the Department of Defense’s daily funding session. Meanwhile, Boeing released its Q1 delivery figures and Harris Corp. HRS announced a business deal with Elbit Systems.

Recap of the Last Week’s Important Stories

1.    Northrop’s business unit, Aerospace Systems, recently clinched a modification contract for full-rate production of 24 E-2D Advanced Hawkeye aircraft of the 7th lot. The deal was awarded by the Naval Air Systems Command, Patuxent River, MD.

Valued at $3.2 billion, this multi-year agreement is expected to be completed by August 2026 (read more: Northrop Grumman Wins $3.2B Deal to Build E-2D Hawkeye Jet).

2.    Lockheed's business segment, Aeronautics, recently secured a modification contract to procure long-lead items for the manufacture and delivery of 21 F-35 Lightning II low-rate initial production aircraft from the 14th Lot. The deal has been awarded by the Naval Air Systems Command, Patuxent River, MD.

Valued at $151.3 million, the contract will cater to the governments of Australia and Norway (read more: Lockheed Martin Wins $151M Deal to Aid F-35 Aircraft Program).

3.    Boeing’s recently released delivery numbers reflect a 19% decline in its commercial shipments from the first quarter of 2018. The aerospace giant reported first-quarter 2019 commercial deliveries of 149 airplanes, down year over year on a steep decline in demand for 737 jets.

Delivery of the single-aisle 737 jets declined to 89 in the first quarter of 2019 from 132 a year ago. Demand for Boeing's 737 jets suffered a setback during the first quarter of 2019 as the company received only 32 new orders for the jet compared with 122 in the year-ago quarter.

Further, the situation worsened toward the end of the first quarter when the company’s 737 Max jets were grounded to avoid uncertainties in the wake of  the crash of a 737 Max 8 jet aircraft operated by Ethiopian Airlines that killed all passengers (read more: Boeing Q1 Commercial Deliveries Down on Low 737 Jet Demand).

4. Harris Corp. agreed to sell its Night Vision business to Elbit Systems — a major defense electronics maker — for $350 million in cash. The technology and communications company intends to utilize the sale proceeds to pre-fund the L3 Harris pension and return cash to its shareholders.

Notably, the divested business is a leading provider of night vision technology for security forces and federal homeland security. The transaction is, however, subject to the successful completion of Harris’ proposed merger with L3 Technologies (LLL) (read more: Harris Divests Night Vision Line to Elbit Systems for $350M).

Performance

Over the last five trading sessions, the defense biggies put up a solid show, except Boeing and Textron. Lockheed gained the most with a 1.1% rise in its share price, followed by Raytheon.

The industry's performance over the last six months has also been mostly impressive, except that of Lockheed. Textron has been the biggest gainer, with a 5% increase in its share price.

The following table shows the price movement of the major defense players over the last five trading days and during the last six months.

Company Last Week Last 6 Months
LMT 1.07% -6.34%
BA -5.47% 3.36%
GD 0.18% 1.21%
RTN 0.98% 3.38%
NOC 0.55% 2.95%
TXT -1.24% 4.55%
LLL 0.45% 2.82%



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