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Defense Stock Roundup: US Likely to Limit Investment in China, NOC Wins Big

Zacks Equity Research

U.S. defense stocks witnessed a generous flow of funds from the Pentagon over the trailing five trading sessions. While this had ample potential to substantially boost the aerospace and defense industry, turmoil in the broader market acted as an offset. Specifically, U.S. equity markets declined on Sep 27, with the S&P 500 ending the week down 1%, following reports that the White House is now considering setting limits on U.S. investment in China. As a result, major indices of the aerospace and defense industry performed poorly. Notably, the S&P 500 Aerospace & Defense (Industry) index inched up 0.09%, while the Dow Jones U.S. Aerospace & Defense index slipped 0.06% in the past five trading sessions.

Among last week’s highlights, defense majors namely Northrop Grumman Corp. NOC, Lockheed Martin Corp. LMT and The Boeing Company BA secured a number of notable deals from the Department of Defense’s daily funding session. Moreover, AAR Corp. AIR released its quarterly earnings report.

Recap of Past Week’s Important Stories

1. Northrop Grumman’s business division clinched a modification contract worth $1.36 billion for the production and delivery of nine E-2D Advanced Hawkeye aircraft to Japan. The deal has been awarded by the Naval Air Systems Command, Patuxent River, MD.

Work related to the agreement will be carried out at various locations inside and outside the continental United States. Northrop’s E-2D Advanced Hawkeye has been a game changer for the U.S. Navy, enabling it to conduct battle management command and control (read more: Northrop Grumman Wins $1.4B Deal to Deliver 9 Hawkeye Jets).

The company’s business unit secured another contract in the past five trading sessions. This deal involves delivery of Multi-Function Active Sensor Radar Systems for the MQ-4C Triton unmanned aircraft system. The deal has been awarded by the Defense Logistics Agency Aviation, Philadelphia, PA.

Valued at $375.8 million, the contract is scheduled to be completed by Dec 31, 2025 (read more: Northrop Grumman Wins $376M Deal to Support Triton UAS).

2. Lockheed Martin’s Aeronautics segment won a modification contract worth $352.7 million for procuring Generation 3 helmet mounted displays from 12th-14th lots to support the F-35 Lightning II program. The deal has been awarded by the Naval Air Systems Command, Patuxent River, MD. The contract is expected to be completed by December 2020.

According to Forecast International, a total of 3,401 fighter aircraft are expected to be produced from 2019 through 2028. Of the nearly 3,400 fighters expected to roll off the production lines during the next 10 years, 1,548 jets are projected to be F-35s, representing 45.5% of the market (read more: Lockheed Martin Wins $353M Deal to Support F-35 Program).

3. Boeing’s defense unit secured a $280-million deal to provide engineering support to the Small Diameter Bomb (SDB) I weapon system. The contract was awarded by the Air Force Life Cycle Management Center, Eglin Air Force Base, FL.

Per the terms, the BDS unit will provide SDB weapon integration on selected weapon platforms and support the fielded weapon system. Work related to the deal is scheduled to be completed by September 2024 (read more: Boeing Wins $280M Deal to Support SDBI Weapon System).

In the trailing five trading sessions, the company also won a $227-million contract for the procurement of main and nose landing gear assemblies in support of the F/A-18E/F and EA-18G aircraft.

The contract was awarded by the Naval Supply Systems Command Weapon Systems Support, Philadelphia, PA. Work related to the deal is expected to get completed by March 2023 (read more: Boeing Wins $227M Deal to Support F/A-18 and EA-18 Programs).

4. AAR Corp. reported first-quarter fiscal 2020 adjusted earnings of 57 cents per share, surpassing the Zacks Consensus Estimate by 9.6%. The figure reflected a year-over-year improvement of 5.6%.

The company’s net sales of $541.5 million exceeded the Zacks Consensus Estimate by 8.7% and also increased 16.1% from the year-ago quarter. As of Aug 31, 2019, AAR Corp’s cash and cash equivalents amounted to $39.9 million compared with $21.3 million as of May 31, 2019.
AAR Corp reaffirmed its financial guidance for fiscal 2020 (read more: AAR Corp Q1 Earnings Top Estimates on Higher Y/Y Sales).

Performance

Over the past five trading sessions, defense biggies put up a mixed show. Boeing gained the most with its share price rising 0.91%, while Lockheed Martin and General Dynamics GD suffered a decline.

The industry's performance over the last six months has been mostly impressive. Northrop Grumman gained the most this time with its share price rising more than 37%, while Textron slipped 3%.

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 -0.19% 29.22%
BA 0.91% 0.38%
GD -2.32% 8.12%
RN 0.30% 7.38%
NOC 0.81% 37.68%
LDOS -1.52% 32.66%
TXT -3.40% -2.88%
LHX -1.44% 30.81%

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