Defense Stock Roundup: Lockheed's $133M Deal In Focus, Huntington Wins $110M Contract

As we reach the last lap of the most-awaited U.S. Presidential Election, all eyes are on the contenders, Democratic candidate Hillary Clinton and her Republican rival Donald Trump. While who eventually takes the crown is for time to tell, Clinton’s campaign reportedly has an upper hand over Trump’s in her key battleground states like Florida, North Carolina and Pennsylvania.

That may be the reason why the major defense industry indices showed negative investor reaction despite Trump's emphasis on significantly increasing defense expenses in his game-changing military bill proposed last week. Both the S&P 500 Aerospace & Defense (Industry) Index and the Dow Jones U.S. Aerospace & Defense Index declined 1.9% in the last five trading sessions.

Among the highlights of the week, defense giants Lockheed Martin Corp. (NYSE:LMT) , Northrop Grumman Corp. (NYSE:NOC) and Huntington Ingalls Industries, Inc. (NYSE:HII) clinched a few important contracts in the Pentagon’s daily funding session.

(Read Defense Stock Roundup for Sep 6, 2016 here.)

Recap of the Week’s Most Important Stories

1. Lockheed Martin's Aeronautics division has won a modification contract from the U.S. Air Force for the government-configured KC-130J aircraft. Under this $132.6 million contract, Lockheed Martin will supply 2 KC-130J aircraft to France.

The contract was awarded by the Air Force Life Cycle Management Center, Wright-Patterson Air Force Base, OH. Work is scheduled to be executed in Marietta, GA and will be completed by Apr 30, 2020. Lockheed currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lockheed’s KC-130J is a multi-role tanker aircraft, which is an advanced derivative of its renowned C-130J transport jet. Primary missions of the KC-130J tactical aircraft include aerial refueling, tactical transportation of passengers and cargo, aerial delivery, ground refueling and emergency re-supply. The jet can accommodate 92 ground troops or 64 paratroopers, along with their equipment. (Read more: Lockheed Martin Wins $133M Deal for KC-130J Aircraft)

2. In a separate business development, Lockheed Martin announced that the company has successfully manufactured the first Guided Multiple Launch Rocket System (GMLRS) Alternative Warhead rocket at its Camden, AR facility. The GMLRS Alternative Warhead is the next generation of Lockheed’s MLRS family of munitions.

The GMLRS Alternative Warhead can engage the same target set and achieve the same area-effects requirement like the MLRS submunition warheads, but it additionally averts the risk of unexploded ordnance. Given that submuniton, warheads are banned now owing to international treaties, Lockheed’s GMLRS Alternative Warhead rocket will enable MLRS customers to stock area-effects weapon in their inventories without the need to procure additional launcher systems.

So far, Lockheed has produced over 25,000 GMLRS rockets at the Camden facility, having received more than 60 awards for the rocket over the last decade. We expect the new GMLRS Alternative Warhead to enjoy similar demand, going ahead.

Lockheed Martin has also recently signed a Letter of Intent (LoI) with Polish defense company, Polska Grupa Zbrojeniowa (PGZ). As per the LoI, PGZ member companies will participate in the manufacturing of Lockheed’s satellite systems, aircraft, helicopters, weapons, combat systems, training devices and simulators.

The agreement boosts Lockheed’s growth opportunities in the Polish defense space, particularly given its purchase of Sikorsky last year, which has more than 1500 direct employees in Poland.

3. Military shipbuilding major, Huntington recently received a modification contract from the U.S. Navy to exercise options for nuclear submarines. Valued at $109.9 million, the contract was awarded by the Naval Sea Systems Command, Washington, DC.

Per the latest modification, Huntington Ingalls will provide engineering, technical and design services, and manage configuration and database. Work is scheduled to be complete by Sep 2018 and will be carried out in Newport News, VA.

Being the prime industrial employer in Virginia, Huntington is one of only two companies that designs and builds nuclear-powered submarines for the Navy. Over 70% of the active Navy fleet consists of Huntington Ingalls ships. As the shipbuilding business outlook remains strong given the enacted fiscal 2016 budget and fiscal 2017 proposal, we expect this contract win to significantly benefit the company (Read more: Huntington Ingalls Unit Wins $110M U.S. Navy Contract).

4. Another defense prime, Northrop Grumman’s business unit, Systems Corp., clinched a contract from the U.S. Navy to produce 10 MQ-8C Fire Scout unmanned air systems. The contract, worth $108.1 million, was awarded by the Naval Air Systems Command, Patuxent River, MD. Work is scheduled to be complete by Aug 2019 and the majority of the work will be performed in San Diego, CA.

Notably, MQ-8C Fire Scout, the Navy’s next-generation unmanned helicopter, is equipped with Northrop Grumman's unmanned systems architecture that can be mounted from both land and sea. All tests on the MQ-8C are complete and the copter is now waiting to be deployed.

Being the fourth-largest U.S. defense contractor, this contract will add on to the long list of backlog the company currently boasts (Read more: Northrop Grumman Clinches $108M Contract for Fire Scout).

Performance

Most of the defense majors put up a disappointing performance over the past five trading sessions, with each suffering low single-digit losses in share prices. Raytheon Company (NYSE:RTN) was the biggest loser, while Textron Inc.’s (NYSE:TXT) stock witnessed a decline less than 1%.

However, over the past six months, most stocks in this industry have been on the rise, barring Rockwell Collins Inc. (NYSE:COL) . L-3 Communications Holdings Inc. (NYSE:LLL) gained the most, followed by Textron.

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