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Defense Stock Roundup: TXT, HON, LMT and COL

Zacks Equity Research

The Q1 earnings season is in full swing, with almost 800 companies set to report their quarterly results this week, including 191 S&P 500 members. So far, the reporting cycle has seen steady, accelerating growth as compared to the preceding quarter.

This quarter is also likely to record the best performance in almost three years. As far as the broader Aerospace sector is concerned, although the earnings growth projections are not very inspiring, 50% of the stocks that have released their quarterly numbers came up with an earnings beat as of Apr 21.

In fact, the outlook for defense stocks improved significantly following the proposal of a 10% hike in President Trump’s fiscal 2018 defense budget presentation last month, which also brought with it an additional $30 billion appropriations request for this fiscal.

Now, taking a look at the last five trading sessions, major indices of the Aerospace-Defense industry are found to have recorded growth, probably on expectations of an earnings upside from the majority of the defense biggies lined up to release their numbers this week. A generous flow of funds from the Pentagon also benefitted the industry over the trailing five sessions. While the S&P 500 Aerospace & Defense (Industry) Index gained 3.6%, the Dow Jones U.S. Aerospace & Defense Index rose 2.7% during this period.

Among last week’s highlights, defense primes Textron Inc. TXT, Honeywell International Inc. HON, Rockwell Collins, Inc. COL and Lockheed Martin Corp. LMT released their quarterly figures. Meanwhile, Lockheed Martin and Raytheon Company RTN secured a few contracts from the Department of Defense (DoD).

Recap of Last Week’s Key Stories

1. Diversified U.S. conglomerate Textron kick started the first-quarter 2017 earnings season for the aerospace and defense industry.

While adjusted earnings from continuing operations were in line with the Zacks Consensus Estimate, revenues missed the mark. Revenues were also down from the year ago quarter level. Segment-wise, Bell and Textron Aviation units continued to lag.

On the guidance front, Textron slashed its 2017 earnings per share (EPS) guidance to the range of $2.40–$2.60. Meanwhile, the company continues to expect cash flow from continuing operations (of the manufacturing group) before pension contributions in the $650–$750 million band for 2017 (read more: Textron Posts In-Line Q1 Earnings, Cuts '17 EPS View).

2. Honeywell International reported its first-quarter 2017 results, wherein both adjusted earnings as well as revenues surpassed the Zacks Consensus Estimate. On a year-over-year basis, the performance was mixed bag as earnings increased while revenues declined.

The revenue downside was led by adverse foreign currency translation and divestiture of the Resins and Chemicals, and Aerospace government services businesses in 2016.

In terms of outlook, management aims to focus on strategic investments, greater operational efficacy and stronger demand for Honeywell’s diversified products to boost near-term results. Further, the company expects earnings in the range of $6.90–$7.10 per share for full-year 2017 (read more: Honeywell Beats Q1 Earnings, Revenue Estimates).

3. Aviation electronics maker Rockwell Collins posted better-than-expected results in second-quarter fiscal 2017. Its adjusted earnings per share as well as revenues comfortably exceeded the Zacks Consensus Estimate.

Higher sales at Government Systems and Information Management Services segments attributed to the revenue upside. Adjusted EPS for fiscal 2017 is projected in the range of $5.95–$6.15.

Moreover, the company has raised its fiscal 2017 revenue guidance to the range of $6.7–$6.8 billion from $5.3–$5.4 billion. Total segment operating margin is now expected to be in the band of 19%–20% compared with the previous guidance of 21% (read more: Rockwell Collins Tops Q2 Earnings, Revises FY17 View).

4. The Pentagon’s largest defense contractor, Lockheed Martin, released mixed first-quarter 2017 results yesterday.

While earnings from continuing operations surpassed the Zacks Consensus Estimate, revenues missed the same. Nevertheless, year-over-year revenues increased on account of growth across all the segments. The company’s backlog dropped almost 3% from the year-ago quarter.

Coming to its outlook, Lockheed Martin expects 2017 revenues in the range of $49.5–$50.7 billion, higher than the earlier provided projection of $49.4–$50.6 billion. However, the company reduced its EPS guidance to the range of $12.15–$12.45 for 2017 (read more: Lockheed Martin Beats on Q1 Earnings, Backlog Drops).

Meanwhile, the company clinched a $100 million contract from the U.S. Air Force to support the production of Joint Air-to-Surface Standoff Missile (JASSM). Work under this deal is scheduled to be completed by Apr 17, 2022.

Per the contract, Lockheed Martin will provide lifecycle support for work related to JASSM, Long Range Anti-Ship Missile (Air Force Inventory), JASSM-Extended Range and any JASSM variant to support system upgrades, integration, production, sustainment, management and logistics.

JASSM is a stealthy, precision-guided cruise missile with a penetrating blast-fragmentation warhead. These missiles are incorporated with infrared seekers and enhanced digital anti-jam Global Positioning System (read more: Lockheed Martin Wins $100M Support Contract for JASSM).

5. Defense behemoth Raytheon’s Integrated Defense Systems unit recently clinched a Navy contract worth $111.3 million for providing total ship activation and engineering services to support the Zumwalt-Class Destroyer program. Work related to this deal is scheduled to be over by Apr 2021.

Per the terms of the contract, Raytheon will offer production, integration, activation, and testing on Zumwalt-Class ship mission systems and missions systems equipment. Notably, options included in this contract, on being exercised, can bring the cumulative value of the agreement to $490.2 million.

Last Week’s Performance

All the major defense biggies posted impressive numbers over the past five trading sessions. Rockwell Collins’ share gained the most with a 7.62% hike, followed by General Dynamics Corp. GD.

Over the past six months as well, all of the industry majors delivered a stellar performance, except Northrop Grumman Corp. (NOC). Notably, Boeing gained the maximum at 22.31%, followed by Rockwell Collins.

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

Company Last Week Last 6 Months
LMT 0.14% 1.54%
BA 2.86% 22.31%
GD 2.92% 12.30%
RTN 2.05% 5.02%
NOC 1.80% -0.18%
COL 7.62% 13.50%
TXT 2.22% 2.35%
LLL 2.32% 9.02%


What’s Next in this Space?

Both Raytheon and L3 Technologies Inc. LLL are set to report their first-quarter 2017 results on Apr 27.

Embraer S.A. ERJ is slated to release its first-quarter results on May 2.

On May 3, Spirit Aerosystems Holdings, Inc. SPR will post first-quarter 2017 numbers, while Harris Corporation (HRS) is expected toreport its third-quarter fiscal 2017 results.

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Embraer-Empresa Brasileira de Aeronautica (ERJ): 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
Spirit Aerosystems Holdings, Inc. (SPR): 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
L-3 Communications Holdings, Inc. (LLL): Free Stock Analysis Report
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