For Immediate Release
Chicago, IL – April 12, 2016 – Today, Zacks Equity Research discusses the Aerospace & Defense, part 1, including Lockheed Martin Corp. (LMT), Boeing Co. (BA), Northrop Grumman Corp. (NOC), General Dynamics Corp. (GD) and Raytheon Co. ( RTN).
Industry: Aerospace & Defense, part 1
The importance of the aerospace & defense industry stems from the strategic role it plays in the country’s security. As threats turn into ever new shapes involving asymmetric, air-sea power, cyber, urban, non-state organizations and many more, the defense capabilities of a country need to morph accordingly to contain them.
A politically unstable planet has led to various nations stepping up their defense capabilities. The direct beneficiary of a volatile geo-economy is undoubtedly the aerospace and defense players. The U.S. defense firms have particularly tasted success in the ”rest of the world.” Countries allied to U.S. policy are spending substantially on sophisticated artillery to wage the war against terror and sectarian forces. The crisis has been acutely felt with the meteoric rise of the Islamic State of Iraq and Syria (ISIS), a situation that President Obama coined “the network of death.”
Moreover, the aerospace and defense industry has gained from fleet renewals at airlines worldwide. Demand for more fuel-efficient aircraft, a growing international market and increasing application of unmanned aircraft in warfare today have driven up sales in this sector.
On top of it, the recent budget agreement is a net positive for defense players. However, readings on the U.S. economy since the beginning of 2016 have been mixed. While many indicators including labor market data, declining unemployment rate, moderate expansion of consumer spending and housing market recovery were favorable, a continued decline in manufacturing and net exports owing to slow global growth and the significant appreciation of the dollar can’t be ignored.
Per the Atlanta Federal Reserve's GDPNow forecast model, Q1 GDP growth was just 0.1%, down from a 0.4% earlier estimate.
On Feb 9, 2016, President Obama unveiled the Pentagon's fiscal year 2017 (FY 2017) budget request that is intended to reshape spending priorities taking into account new and evolving challenges.
Obama’s fiscal year 2017 budget proposal of $582.7 billion for the Pentagon includes a base budget of $523.9 billion. This is a $2.2 billion increase over the FY 2016 enacted budget of $521.7 billion. Additionally, it provided $58.8 billion in funding for the Pentagon’s separate war fund, the overseas contingency operations (“OCO”) fund, almost the same as the FY 2016 enacted level of $58.6 billion. The combined request represents a total increase of $2.4 billion or less than 1% over FY 2016 enacted levels.
The budget proposal mainly addresses five key challenges, namely, the threat of Russian aggression in Europe as well as that of China in the Asia-Pacific, North Korea to the U.S. and its Pacific allies, Iran’s influence against allies in the Gulf, and the ongoing fight against the Islamic State.
Zacks Industry Rank - Mixed Bag
The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks. The way to look at the complete list of 257+ industries is that the outlook for the top one-third of the list (Zacks Industry Rank of #88 and lower) is positive, the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is neutral while the outlook for the bottom one-third (Zacks Industry Rank #177 and higher) is negative.
The aerospace industry is one of the 16 broad Zacks sectors within the Zacks Industry classification. Within the Zacks Industry classification, aerospace is further sub-divided into three industries at the expanded level: aerospace/defense, aerospace/defense equipment and electric-military.
Aerospace/defense is neutral with a Zacks Industry Rank #94. The Zacks Industry Rank for Electric-military is at #41 out of 257 industries, which puts it in a positive zone. Aerospace/defense equipment with a Zacks Industry Rank #197 comes in the bottom one-third or in the negative territory of all Zacks industries.
Earnings Review and Outlook
Every fiscal year, no matter how constrained the funding picture, the Pentagon almost always gets its way. Despite headwinds, the aerospace and defense sector held up well in the last reported quarter. The earnings beat ratio (percentage of companies coming out with positive surprises) of all aerospace and defense companies was an impressive 77.8% in the fourth quarter of 2015.
Yet earnings and revenues declined 13% and 2.8%, respectively, over the prior year. Growth remained challenged for most of the quarter thanks to a strong dollar and weak energy prices. Moreover, the persistent slowdown in China deepened global economic woes. In spite of the macro issues, the top contractors, such as, Lockheed Martin Corp. (LMT), The Boeing Co. (BA), Northrop Grumman Corp. (NOC), General Dynamics Corp. (GD) and Raytheon Co. ( RTN) have posted impressive results given elevated geopolitical risks and strong commercial sales.
However, the earnings picture for the first quarter of 2016 and for the full year looks grim. The sector’s earnings are expected to decline 10.5% in the first quarter. Revenues, however, are expected to see 1.1% growth (versus a 2.8% decline in Q4).
In comparison, for the S&P 500, earnings are expected to decline at a rate of 11.1% and revenues will likely take a hit of 2.3% in the first quarter.
To Sum Up
While there are various other variants that affect the stock market, the terror spawned by ISIS sparked renewed anger around the world following the Paris and Brussels attacks. This has drawn investors’ attention once again to defense stocks.
Amid the ups and downs of Federal budgets, we advise investors to consider this trouble-free and proven investment strategy of putting in money where the fundamentals are strong. Despite a multitude of challenges, the long-term outlook for the defense industry looks stable in a volatile political climate.
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LOCKHEED MARTIN (LMT): Free Stock Analysis Report
BOEING CO (BA): Free Stock Analysis Report
NORTHROP GRUMMN (NOC): Free Stock Analysis Report
GENL DYNAMICS (GD): Free Stock Analysis Report
RAYTHEON CO (RTN): Free Stock Analysis Report
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