Defense Stock Roundup: Q3 Earnings Beat At LDOS, Miss At HII; Big Wins At BA, BAESY & RTN

With majority of the defense majors reporting Q3 figures, the overall growth picture shows quite an improvement when compared to the past few quarters. Though overall most of the defense companies came up with an earnings beat, the last five trading sessions saw mixed performances.

Consequently, the major indices for the Aerospace and Defense sector slipped to red last week, in stark contrast to the trend over the past couple of weeks. While the S&P 500 Aerospace & Defense (Industry) index dropped 0.2%, the Dow Jones U.S. Aerospace & Defense Index lost 0.3% in the five trailing trading sessions.

Among last week’s highlights, Leidos Holdings, Inc. (NYSE:LDOS) posted an earnings beat while Huntington Ingalls Industries, Inc. (NYSE:HII) failed to surpass estimates. Meanwhile, a handful of defense contract wins by biggies like The Boeing Company (NYSE:BA) , BAE Systems plc (NYSE:BA) and Raytheon Company (NYSE:RTN) made it to the headlines.

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

Recap of the Week’s Most Important Stories

1. Leidos Holdings posted third-quarter 2016 adjusted earnings of $1.25 per share, beating the Zacks Consensus Estimate by 31.6%. Reported earnings also surged 71.2% from the year-ago figure.

However, total revenue of $1,868 million missed the Zacks Consensus Estimate by 1%. Reported revenues were, nevertheless, up 43.5% year over year. On the guidance front, for 2016, the company revised its earnings guidance to the range of $3.50 to $3.60, compared to the prior guidance of $3.15–$3.35. (read more: Leidos Holdings Tops Q3 Earnings, Revises '16 View).

2. Nuclear shipbuilder, Huntington’s third-quarter 2016 adjusted earnings of $2.27 per share missed the Zacks Consensus Estimate by 5%. Reported earnings also declined 3.4% year over year, owing to lower contribution from its Newport News Shipbuilding and Ingalls Shipbuilding divisions.

Total revenue of $1,683 million also missed the Zacks Consensus Estimate of $1,731 million. Further, the top line declined 6.5% from the year-ago figure. The company received new orders worth $1.2 billion and exited the quarter with a total backlog of $2 billion (read more: Huntington Ingalls Misses Q3 Earnings on Lower Sales)

Meanwhile, Huntington recently agreed to acquire Camber Corporation, a government services company headquartered in Huntsville, AL; to diversify its revenue stream. Per management, this deal is in line with the company’s long-term strategy to optimize and expand its services portfolio while continuing to invest in its shipbuilding business. Concurrent with the news of the acquisition, Huntington Ingalls announced that it has raised its quarterly dividend to 60 cents per share, up 20% from the previous payout of 50 cents.

3. Aircraft major, Boeing recently clinched a contract worth $478.8 million from the U.S. Air Force, for engineering, manufacturing and developing the F-15 Eagle Passive/Active Warning and Survivability System (EPAWSS). Work related to this deal is expected to be over by Aug 31, 2020. Notably, the F-15 Strike Eagle is a twin-engine, all-weather fighter jet with a proven design that is undefeated in air-to-air combat.

Per the contract, the company will provide planning, design development, integration, testing and risk reduction services in support of the F-15 EPAWSS program. F-15 EPAWSS program is an advanced electronic warfare solution offered by BAE Systems, which provides the F-15 with improved reliability and maintainability, helping reduce long-term life cycle costs.

4. BAE Systems won a contract worth $192 million from the U.S. Navy for the completion and installation of the first two Zumwalt-class guided missile destroyers – USS Zumwalt and USS Michael Monsoor. The agreement will also include execution of approved engineering changes necessary for the ships’ construction.

Work related to this contract will be carried out in San Diego, CA, and is expected to be completed by Sep 2021. The work for the contract will also include execution and corrective action required for government responsible trial cards/deficiencies as well as new work identified between custody transfer and PSA.

5. Defense major Raytheon grabbed a modification contract worth $177.9 million from the U.S. Navy for the procurement of multi-year fiscal 2016-2017 Evolved Seasparrow Missiles Block I production requirements. Per the contract, the company will provide 186 all up rounds, inert operation missiles, spare components, shipping containers and provide other production-related support.

This modified contract, expected to be over by Mar 2020, includes foreign military sales to Spain, Thailand, and United Arab Emirates. Notably, Evolved Seasparrow Missile is a medium-range, surface-to-air missile designed and manufactured by Raytheon. This missile offers high lethality against anti-ship missiles.

Last Week’s Performance

Majority of the prime defense securities put up an impressive show last week, except Lockheed Martin Corp. (NYSE:LMT) . In the last five trading sessions, Textron Inc. (NYSE:TXT) gained the most, having rallied 3.03%, followed by General Dynamics Corp. (NYSE:GD) .

Over the past six months, a similar picture was observed, except for Lockheed Martin and Rockwell Collins Inc. (NYSE:COL) . Northrop Grumman Corp. (NYSE:NOC) recorded the highest gain, followed by Textron.

The following table shows the price movement of the major defense players over the past five trading days and the last six months.

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