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Defense Stock Roundup: Q3 Picture Impressive, LMT, BA, UTX, GD Earnings Beat

Zacks Equity Research
Investors' skepticism surrounding rising interest rates and simmering trade dispute between China and the United States caused the major indices of the Aerospace-Defense space to dip in the last five trading sessions.

As of Oct 24, the Zacks Aerospace sector has witnessed earnings growth of 37.1% year over year on 10.7% sales improvement in the current reporting cycle.

Such impressive quarterly numbers significantly should have provided an impetus to the defense stocks. However, several macroeconomic concerns induced these stocks to end in the red over the last five trading sessions. Notably, investors’ skepticism surrounding rising interest rates and simmering trade dispute between China and the United States caused the major indices of the Aerospace-Defense space — the S&P 500 Aerospace & Defense (Industry) and the Dow Jones U.S. Aerospace & Defense index — to lose 4.7% in the aforementioned time period.

Nevertheless, quarterly results from a number of Aerospace-Defense majors namely Lockheed Martin Corp. LMT, The Boeing Company BA, United Technologies, Corp. UTX, General Dynamics Corp. GD, Northrop Grumman Corp. NOC and Leidos Holdings, Inc. LDOS remained a key area of investors’ focus.

Recap of Past Week’s Important Stories

1.    Lockheed Martin’s third-quarter 2018 earnings of $5.14 per share surpassed the Zacks Consensus Estimate of $4.32 by 19%. Total revenues came in at $14.32 billion, outpacing the Zacks Consensus Estimate of $13.15 billion by 8.9%.

The company ended the third quarter (on Sep 30, 2018) with $109.2 billion in backlog, up 4% from $105 billion at the end of second-quarter 2018.

Lockheed Martin increased its share repurchase authority by $1 billion. For 2018, it expects to generate revenues of $53 billion compared with prior expected range of $51.6-$53.1 billion (read more: Lockheed Martin Q3 Earnings Beat, '18 EPS View Up).

2.    Boeing’s adjusted earnings came in at $3.58 per share for third-quarter 2018, beating the Zacks Consensus Estimate of $3.45 by 3.8%. Revenues amounted to $25.15 billion in the quarter, which exceeded the consensus estimate of $23.72 billion by 6%.

Backlog at the end of third quarter increased to $491.2 billion from $488 billion at the end of the second quarter. The company generated $12.38 billion of operating cash flow at the end of the quarter, up 18.5% year over year.

For 2018, the company expects to generate adjusted or core earnings per share in the range of $14.90-$15.10 compared with $14.30-$4.50 anticipated earlier (read more: Boeing Q3 Earnings Surpass Estimates, '18 EPS View Up).

3.    United Technologies’ adjusted earnings in third-quarter 2018 came in at $1.93 per share, surpassing the Zacks Consensus Estimate by 6.6%. Revenues totaled $16,510 million, which outpaced the consensus mark of $16,140 million.

As of Sep 30, 2018, United Technologies had cash and cash equivalents of $13,799 million, up from $8,985 million recorded as of Dec 21, 2017.

For 2018, the company raised its earnings guidance to the range of $7.20-$7.30 per share from $7.10-$7.25 per share projected previously (read more: United Technologies Q3 Earnings Top, '18 EPS View Up).

4.    General Dynamics’ third-quarter 2018 earnings from continuing operations came in at $2.89 per share, beating the Zacks Consensus Estimate of $2.74 by 5.5%. However, the total revenues of $9,094 million missed the Zacks Consensus Estimate of $9,427 million by 3.5%.

The company recorded a total backlog of $69.5 billion, up 4.9% sequentially. Free cash flow from operations at the end of the third quarter was $622 million compared with $752 million in the year-ago quarter.

As of Sep 30, 2018, General Dynamics cash provided by operating activities were $790 million compared with $872 million in the prior-year period (read more: General Dynamics Beats on Q3 Earnings, Sales Up Y/Y).

5.    Northrop Grumman delivered third-quarter 2018 earnings of $6.54 per share, which outpaced the Zacks Consensus Estimate of $4.35 by 50.4%. Total revenues of $8.09 billion surpassed the consensus estimate of $8 billion by 1%.

Net cash inflow from operating activities in the first nine months of 2018 amounted to $1.45 billion compared with the year-ago figure of $1.01 billion.

Northrop Grumman intends to generate earnings of $18.75-$19 per share compared with the earlier guidance of $16.60-$16.85 (read more: Northrop Grumman Q3 Earnings Surpass, 2018 View Up).

6.    Leidos Holdings posted third-quarter 2018 adjusted earnings of $1.14 per share, beating the Zacks Consensus Estimate of $1.10 by 3.6%. It recorded  total revenues of $2,575 million, which missed the Zacks Consensus Estimate of $2,636 million by 2.3%.

At the end of third-quarter 2018, the company’s backlog of signed business orders was $20.3 billion, of which $6.2 billion was funded.

For 2018, Leidos Holdings expects its earnings to be in the range of $4.20 to $4.40 per share compared with $4.15 to $4.50 projected earlier (read more: Leidos Holdings Q3 Earnings Surpass, Revenues Lag).

Performance

Over the past five trading sessions, the defense biggies put up a dismal show. Northrop Grumman lost the most with 10.8% share price decline. Only Boeing gained in this time period.

The industry's performance over the last six months has been impressive, except Lockheed Martin and L3 Technologies. Boeing once again gained the most, with its shares rallying 7.7% followed by General Dynamics.

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 -6.66% -5.27%
BA 0.84% 7.71%
GD -10.67% 4.86%
RTN -7.55% 0.46%
NOC -12.30% 0.87%
COL -1.51% 4.45%
TXT -5.01% 2.62%
LLL -6.79% -1.24%

What’s Next in this Space?

FLIR Systems FLIR and Curtiss-Wright Corp are scheduled to report their Q3 numbers on Oct 30.

While Spirit AeroSystems is set to release its third-quarter results on Oct 31, Aerojet Rocketdyne is expected to release its third-quarter numbers on Nov 1.

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