Defense Stock Roundup: Huntington Ingalls Beats On Q2 Earnings; RTN, OA, GD, LMT In Focus

The second-quarter reporting cycle is drawing to a close. As of Aug 5, 95.6% of the market cap of the aerospace and defense sector have released their quarterly numbers. Reported results reveal a 28.8% decline in second-quarter earnings despite 2.7% growth in revenues. Among the defense majors, Huntington Ingalls Industries (NYSE:HII) , the nation’s largest military shipbuilder, reported mixed second-quarter results last week.

Overall, the sector is expected to suffer a double-digit earnings decline in the second quarter of 2016. Total defense and aerospace sector earnings are likely to be down 27.4% while revenues are expected to grow a slight 1.5%.

Apart from earnings stories, defense companies like Raytheon (NYSE:RTN) and Orbital ATK (NYSE:OA) hit the headlines as they clinched a few big contracts from the Pentagon’s daily funding session. However, not unlike the broader markets, the defense sector registered meek gains last week.

(Read Defense Stock Roundup for Aug 2, 2016 here.)

AEROSPACE/DEFENSE Industry Price Index

AEROSPACE/DEFENSE Industry Price Index

Recap of the Week’s Most Important Stories

1. Huntington Ingalls Industries reported mixed second-quarter results wherein it beat estimates on the bottom line but missed the same on the top line. Its second-quarter earnings also dropped year over year primarily due to lower contribution from its Newport News Shipbuilding division. Moreover, the company expects the second half of 2016 to be “challenging” for Newport News due to the overlapping deliveries of three carriers.

The company’s net cash from operating activities in the first half of 2016 increased 26.7% to $223 million from $176 million a year ago. Free cash flow was $138 million in the first six months of 2016, up 8.7% year over year (read more: Huntington Ingalls Beats on Q2 Earnings, Down Y/Y).

2. The U.S. Missile Defense Agency has awarded Raytheon a contract for 47 new Standard Missile 3 (SM-3) missile interceptors costing more than half a billion dollars. Under a $524 million contract modification, Raytheon will continue efforts to procure the material, fabricate, test and deliver 47 SM-3 Block IB missiles for fiscal 2016. The order could be repeated on the same scale in fiscal years 2017 and 2018, the Defense Department added. The contract has an expected completion date of Sep 30, 2021.

Raytheon has also secured a U.S. Navy contract to continue to provide conversion, system overhaul and upgrade services as well as related hardware for MK 15 Close-In Weapon Systems or CIWS. This modification contract, worth $288 million, will include purchases for the Navy and foreign allies comprising governments of Turkey and Australia, under a Foreign Military Sales (“FMS”) program. Raytheon is slated to complete work under this contract by Dec 2022 (read more: Raytheon Gets $288M Navy Contract for CIWS Upgrade).

Again, Raytheon’s Missile Systems unit won an FMS contract for the procurement of tube launched optically tracked wireless guided missiles for the Marine Corps, Army, and foreign military customers Bahrain and Morocco. This is a modification contract valued at $129.4 million.

3. Orbital ATK has been awarded a $182 million U.S. Missile Defense Agency contract for the Medium Range Ballistic Missile Type 3 Configuration 2 target system. Per the contract, the company will provide production equipment, logistics, associated support equipment, system engineering and analysis and mission operations. Work is slated for completion by Oct 30, 2020.

As ballistic missiles possess diverse ranges, speeds, size and performance characteristics, the system is an integrated, layered architecture that provides multiple opportunities to destroy missiles and their warheads before they reach their targets.

4. General Dynamics’ (NYSE:GD) Mission Systems division has been awarded a follow-on contract by the Defense Advanced Research Projects Agency or DARPA to provide classified network services, support and infrastructure. The contract has a total potential value of $149 million over a five-year period of performance if all options are exercised.

Per the contract, the company will continue to deliver scalable, flexible, network and systems development, design and management to accommodate past, present and future technologies, the company said. The company will also provide insider threat monitoring and reporting solutions that will aid DARPA in early detection of malicious behavior.

5. Lockheed Martin’s (NYSE:LMT) Aeronautics unit won a $102 million contract for additional non-recurring effort and integration efforts required in support of the F-35 Reprogramming Center West. Work under the contract will include the production of F-35 software data loads for laboratory testing, planning for verification and validation (V&V) test, conduct technical support of the test, design, build, and delivery of V&V modification kits and mission data file generation tools for FMS customers.

Performance

It was a mixed performance for defense stocks last week. In the last five trading sessions, Textron (NYSE:TXT) gained the most with over 2.3% share price appreciation, while Northrop Grumman (NYSE:NOC) lost the most by 1.19%.

The six-month picture shows only gains for the major defense stocks. L-3 Communications Holdings (NYSE:LLL) maintained its leading position with almost 27% share price appreciation followed by Textron.

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?

General Dynamics and Rockwell Collins (NYSE:COL) will attend Jefferies 2016 Industrials Conference today.

Orbital ATK will report second-quarter 2016 results on Aug 10.

Boeing (NYSE:BA) and L-3 Communications Holdings will attend Jefferies 2016 Industrials Conference on Aug 10.

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