Defense Stock Roundup: State Department Gives The Nod To Potential Lockheed, Boeing FMS Deals

The S&P 500 Aerospace & Defense (Industry) grew only by a meager 0.81% over the last five trading sessions. But the prospects of the sector look good given the currently favorable defense budget picture. Though the bottom line depreciated in the first quarter in a generally anemic earnings season, the top line of the defense firms has started to show growth.

Among the important headlines last week, foreign military sales or FMS in short hand ruled the proceedings with the State Department giving the green signal to two important proposals – United Arab Emirates’ request to buy a suite of Lockheed Martin Corp. (NYSE:LMT) Hellfire Missiles and Egypt’s proposal for Harpoon missiles.

(Read Defense Stock Roundup for May 10, 2016 here.)

Recap of the Week’s Most Important Stories

1. The State Department has given the nod to United Arab Emirates’ proposal to buy a suite of Lockheed Martin Corp. built AGM-114 R/K Hellfire Category III Missiles through a $476 million FMS agreement with the U.S. government.

Lockheed Martin’s Missile and Fire Control business will be the prime contractor for the award that includes provision of up to 4,000 AGM-114 R/K Hellfires and associated equipment, training and technical support services to the UAE over a three-year period.

UAE plans to use these missile systems to strengthen its homeland defense and secure critical infrastructure against national security threats. DSCA also noted that the FMS contract does not need deployment of U.S. government or contractor representatives to UAE.

Meanwhile, Lockheed Martin Missiles and Fire Control has also won a contract from the U.S. Navy for the Long Range Anti-Ship Missile (“LRASM”) program. The company has been awarded a $321.8 million, cost-plus-incentive-fee U.S. Navy contract for research and development in support of the LRASM program's integration and research phase.

LRASM is an anti-ship missile being developed for the U.S. Navy. Work is scheduled to be completed by Aug 2019 with the majority performed in Orlando, FL and the rest in Troy, AL and Ocala, FL.

2. General Dynamics’ (NYSE:GD) Commercial Cyber Services, a business of General Dynamics Information Technology, has entered into an agreement with a leading provider of cybersecurity for industrial control systems (“ICS”) – NexDefense − to boost its portfolio of cybersecurity services.

Per the agreement, NexDefense will offer its industrial network security monitoring and anomaly detection system to General Dynamics’ information technology business unit. The commercial cyber services unit within General Dynamics’ IT unit will employ NexDefense’s Sophia product to enhance cybersecurity monitoring services particularly in the industrial control system market.

This is crucial for the U.S. after new warnings from the U.S. Department of Homeland Security about the country’s critical infrastructure becoming the next hacking target.

Separately, General Dynamics has won a $184 million contract from the General Services Administration to deliver IT services for the U.S. Army in Europe.

Specifically, this contract was given to General Dynamics One Source, a joint venture of two General Dynamics business units − General Dynamics Information Technology and General Dynamics Mission Systems.

The company will provide IT services for sustainment support in garrison and deployed locations of Mission Command Networks and Systems. This will support USAREUR, Joint, Coalition, and North Atlantic Treaty Organization (“NATO”) operations.

3. The U.S State Department has approved the sale of UGM-84L Harpoon Block II Encapsulated Missiles and Encapsulated Harpoon Certification Training Vehicles (EHCTV) to Egypt. Boeing (NYSE:BA) will serve as the principal contractor under the FMS deal that comprises 20 Harpoon missiles, 2 encapsulated Harpoon certification training vehicles, spares, repair parts and containers.

The DSCA delivered the required certification notifying Congress of this possible sale on May 11, 2016.

4. L-3 Communications Holdings (NYSE:LLL) announced that it intends to close its Electron Devices facility in San Carlos, CA, in late 2017 and move its manufacturing operations to the North Central Pennsylvania and Los Angeles areas. The consolidation initiative is part of the company’s ongoing strategic effort to boost efficiencies across its operations. This will take place through 2017.

Employees of the San Carlos facility will be offered employment at one of the two L-3 locations or given appropriate notice and severance assistance.

Performance

The major defense stocks showed a unimpressive performances last week with all of them ending in the red barring Boeing. Rockwell Collins (NYSE:COL) lost the most followed by Northrop Grumman (NYSE:NOC).

In the past six months, however, the picture is mostly green, barring Boeing and Textron. Northrop Grumman gained the most while Textron (NYSE:TXT) was the biggest decliner.

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?

Northrop Grumman is hosting its 2016 Annual Shareholder Meeting on May 18, 2016.

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