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Defense Stock Roundup: Trump's Promise to Spend 'Big' Lifts Stocks; LMT, BA Win Deals; GD Ups Dividend

Zacks Equity Research

In President Donald Trump’s recent congressional address, he has pledged to put an end to sequestration spending cuts and provide a “historic” boost of $54 billion or 10% to the nation’s 2018 defense spending. He also offered a proposal to expend $30 billion on supplementary military this year. This budget proposal has been largely cheered by U.S. defense biggies.

The mixed performance on the bourses as well as a generous flow of funds from the Pentagon forced the major indices of the Aerospace-Defense sector to end in the green over the trailing five trading sessions. However, hawkish comments from Fed officials as well as increased optimism surrounding a possible rate hike this month might have marred growth of capital-intensive defense stocks to a certain extent. Consequently, the S&P 500 Aerospace & Defense (industry) Index inched up 0.5% while the Dow Jones U.S. Aerospace & Defense Index rose 0.8%.

Among this week’s highlights, defense primes Raytheon Company RTN, The Boeing Company BA and Lockheed Martin Corp. LMT secured a few big contracts from the Department of Defense (DoD). Meanwhile, Honeywell International Inc. HON highlighted its growth expectations at the annual investor conference. Also, General Dynamics Corp. GD raised its quarterly dividend rate while Leidos Holdings Inc. LDOS released fourth-quarter results.

Recap of the Last Week’s Most Important Stories

1. Defense behemoth Raytheon clinched a foreign military sales (FMS) contract worth $1.07 billion from the U.S. Air Force. Under the terms of the deal, the company will provide an early warning radar system to the Qatar government which will be incorporated into the nation’s integrated air and missile defense enterprise. Work related to this deal is expected to be over by Jun 30, 2021.

Raytheon’s upgraded early warning radar system (UEWR) provides prompt detection and accurate tracking of ballistic missiles as well as quick and exact determination of threat versus non-threat objects.

FMS contracts have been a vital growth driver for Raytheon as is evident from the fact that 41% of its 2016 year-end backlog was made up of international orders (read more: Raytheon Wins FMS Deal for Supply of Radar Systems to Qatar).

2. Aircraft major Boeing recently won a contract worth $679 million from the U.S. Navy for the procurement of seven EA-18G and five F/A 18E aircraft. Per the terms of the agreement, the company will obtain airborne electronic attack kits associated with the EA-18G jets. The expected completion date for this deal is Feb 2019.

Notably, Boeing’s EA-18G Growler aircraft is the most advanced airborne electronic attack (AEA) platform, which has 11 weapon stations for carrying electronic mission systems and arms and provides tactical jamming and electronic protection. On the other hand, Boeing’s F/A-18 Super Hornet – a twin-engine, supersonic, all weather multirole fighter jet – is the U.S. Navy’s primary strike and air superiority aircraft.

Being one of the largest aerospace and defense contractors, the Defense, Space & Security segment witnessed healthy revenues and margins during 2016 and a similar progress is expected this year as well (read more: Boeing Wins $679M Navy Deal to Procure 12 Combat Aircraft).

3. Pentagon’s prime contractor Lockheed Martin’s Aeronautics business segment secured U.S. Navy contract worth $1.1 billion for providing recurring logistics support and sustainment services for F-35 Lightning II aircraft. Work related to this deal is expected to be over by Dec 2017.

Per the terms of the deal, Lockheed Martin will offer the services to the U.S. Air Force, Navy, Marine Corps, non-DoD participants as well as FMS customers.

Notably, Lockheed Martin’s F-35 Lightning II is a 5th Generation, single-seat, single-engine fighter jet (read more: Lockheed Martin Wins F-35 Jet Service Deal Worth $1.1B).

The company won a modification contract worth $427.3 million from the U.S Army to exercise fiscal 2016 options for Hellfire II missile production requirements. The expected completion date for this deal is Sep 30, 2020.

4. Industrial goods manufacturer Honeywell International recently debriefed investors about its earnings and sales expectations for the future quarters. The company announced its expectation to generate healthy organic growth on the back of aggressive capital deployment for comprehensive R&D efforts and strategic mergers and acquisitions.

Honeywell also aims to increase its presence in high-growth regions. Population growth, urbanization and infrastructure development continue to create attractive opportunities across its entire portfolio. Additionally, the company is building a robust pipeline of new products.

At the same time, the company reiterated its guidance for the first quarter and full-year 2017. For 2017, Honeywell reaffirmed its earnings per share guidance at $6.85–$7.10 (excluding pension mark-to-market expense), significantly up from $6.46 recorded in 2016. For the first quarter of 2017, earnings are expected in the range of $1.60–$1.64 per share (read more: Honeywell Reiterates Q1 & Full-Year 2017 Guidance).

5. Defense giant General Dynamics recently announced that its management has approved a 10.5% hike in its quarterly common stock dividend. This has taken the annualized payout to $3.36 per share.

The raised dividend is 84 cents per share compared with the prior payment of 76 cents, which will be paid on May 5, 2017, to shareholders on record at the close of business on Apr 7.

Management also approved the repurchase of an additional 10 million shares of the company's issued and outstanding common stock (read more: General Dynamics Declares 10.5% Increase in Dividend).

6. Leidos Holdings posted fourth-quarter 2016 adjusted earnings of 75 cents per share that missed the Zacks Consensus Estimate of 81 cents by 7.4%. Reported earnings also declined 6.7% year over year.

The company’s total revenue of $2,575 million in the fourth quarter surpassed the Zacks Consensus Estimate of $2,571 million by 0.2%. Reported revenues also improved 101% year over year.

At the end of the 2016, the company’s backlog of signed business orders was $17.74 billion, of which $5.98 billion was funded. At 2015-end, total backlog was $9.90 billion, of which $2.52 billion was funded (read more: Leidos Holdings Misses on Q4 Earnings, Gives '17 View).

Last Week’s Performance

The defense biggies posted mixed numbers over the past five trading sessions. While a few like Boeing, Rockwell Collins Inc. COL gained around 1%; others like General Dynamics, Northrop Grumman Corp NOC saw a dip in their share prices.

However, over the past six months, all the industry majors delivered a stellar performance. Notably, Boeing gained the maximum at 36.99%, followed by General Dynamics.

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

 

Company Last Week Last 6 Months
LMT -0.59% 10.19%
BA 1.53% 36.99%
GD -0.39% 22.67%
RTN -0.70% 8.92%
NOC -2.28% 13.12%
COL 0.80% 14.35%
TXT 0.42% 18.05%
LLL -0.80% 10.68%


 

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Northrop Grumman Corporation (NOC): Free Stock Analysis Report
 
Boeing Company (The) (BA): Free Stock Analysis Report
 
General Dynamics Corporation (GD): Free Stock Analysis Report
 
Lockheed Martin Corporation (LMT): Free Stock Analysis Report
 
Rockwell Collins, Inc. (COL): Free Stock Analysis Report
 
Textron Inc. (TXT): Free Stock Analysis Report
 
Honeywell International Inc. (HON): Free Stock Analysis Report
 
Raytheon Company (RTN): Free Stock Analysis Report
 
Leidos Holdings, Inc. (LDOS): Free Stock Analysis Report
 
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