The shares of all big defense contractors suffered across the board in the last week though there was no dearth of contracts or positive news egging the sector on. Lockheed Martin Corp featured prominently among the headlines as it grabbed international contracts along with a few decent defense deals at home. Moreover, the Omnibus spending bill agreed by lawmakers from the U.S. House and Senate provided some respite for the likes of Lockheed Martin andBoeing Company (NYSE:BA).
Boeing also boosted its dividend payout and share repurchase authorization, marking its financial strength. Yet, Boeing’s share price has continued to suffer so far this year.
Iraq Update
As the U.S. led campaign against the al-Qaeda connected Sunni militant group, the Islamic State in Iraq and Syria (“ISIS”) grinds on, the U.S. military has conducted 18 airstrikes against Islamic State (“IS”) forces in Iraq and Syria from Dec 13 to Dec 15, 2014. As part of its proclaimed Inherent Resolve strategy, the U.S. military has conducted airstrikes, comprising 9 in Syria and 9 in Iraq, using fighter, bomber and remotely-piloted aircraft.
Coalition nations conducting airstrikes in Iraq include the U.S., Australia, Belgium, Canada, Denmark, France, the Netherlands and the United Kingdom. Coalition nations conducting airstrikes in Syria include the U.S., Bahrain, Jordan, Saudi Arabia and the United Arab Emirates.
Recap of the Week’s Most Important Stories
1. Rockwell Collins Inc. won a $420 million contract from the U.S. Naval Air Systems Command to continue the delivery of its legacy ARC-210 radio systems aboard military aircraft for the next four years. The ARC-210 radio has the ability to provide voice and data communications and has been installed on more than 180 types of military aircraft in 45 countries. It is now in its fifth generation and employs several frequencies for radio communication that are resistant to enemy jamming.
2. Lockheed Martin nabbed a foreign military sales (“FMS”) contract from the Poland Ministry of Defence, worth $250 million, to supply joint air-to-surface standoff missiles (JASSMs). This deal was approved by the U.S. Congress in October (read more: Lockheed Martin to Supply 40 JASSMs for $250M to Poland).
Apart from this FMS contract, the company secured quite a few defense deals. It won a $235.3 million firm-fixed-price contract to supply electronic and mechanical modules and other related instruments for MK 41 Vertical Launching System (read more: Lockheed Secures Contracts worth $405M from the U.S. Navy).
Lockheed Martin also received a follow-on contract worth $169.3 million to provide the U.S. Air Force, Navy, Marine Corps and other international allies with Depot Phase I-IV services for the support of the Low Rate Initial Production Lot VII F-35 Lightning II Joint Strike Fighter aircraft.
3. Defense majors have something to cheer about this holiday season. On Dec 9, 2014, negotiators from both the House and Senate agreed on a $1.01 trillion spending bill that will fund most of the government through the end of Sep 2015. The new bill includes $554.2 billion for the Pentagon’s base appropriation and $64 billion for Overseas Contingency Operations funding
4. Boeing Co. made some shareholder friendly moves underlining the confidence it has in its commercial aerospace business. The company announced an unexpected 25% increase in future dividend payments and raised its share repurchase authorization to $12 billion from $10 billion.
The payout will now be at 91 cents a share, up from 73 cents earlier and will be payable on Mar 6, 2015, to shareholders of record as of Feb 13, 2015. Despite Boeing’s significant investments to speed up deliveries of its most popular commercial jets, comprising the 787 Dreamliner, the new 737 Max and the new 777X, the increase is commendable.
Although Boeing shares have lost approximately 10.56% in the year-to-date frame, the latest investor friendly moves pushed the shares up 2.3% in after-market trading to $124.89 on Dec 15, 2014.
Other defense majors like Northrop Grumman Corp and L-3 Communications Holdings Inc have also declared share buybacks earlier this month, bringing in good news for their investors and shareholders in this murky climate of budget cuts and sequestration.
Performance
Over the last five trading sessions, the shares of all defense biggies were in the red with General Dynamics Corp suffering the most with an approximate 6.5% fall. Boeing fared not too well either losing 5.9%.
In the past six months, the picture remained somewhat mixed. All the major defense companies have reported gains except Boeing and L-3 Communications Holdings. General Dynamics Corp., Lockheed Martin and Northrop Grumman registered double-digit share price growth, with Northrop Grumman leading the way. Boeing’s telling 7.89% decline was a sore spot.
The following table shows the price movement of the major defense players over the past five trading days and during the last six months.
What’s Next in the Defense World?
Since no major development is expected next week, the performance of these defense stocks is not likely to change radically.
We remind investors that the Zacks Industry Rank for aerospace/defense is within the middle one-third of the list of 260-plus industries, putting it in the neutral zone. Despite the uncertainty related to sequestration, the prospects are still very much in place keeping in mind the ongoing recovery in the U.S. economy and the Iraqi civil war (to know more, please see: Zacks Industry Rank).