Defense Stock Roundup: Lockheed Steals Big Contracts, Rockwell Reports Upbeat Q4 Earnings, L-3 Meets Expectations

Over the last five trading sessions, the defense sector saw some big awards coming from the Department of Defense (DoD), sturdy quarterly performances from well-known defense names and some shareholder friendly news.

Pentagon’s prime contractor Lockheed Martin Corp. (LMT) enjoyed most of the attention as it successfully nabbed quite a few defense deals. United Technologies Corp. (UTX) also secured a big slice from the DoD funding list related to F-35 Lightning II Joint Strike Fighter (:JSF) aircraft. Rockwell Collins Inc. (COL) and L-3 Communications Holdings Inc. (LLL) rounded off the Q3 earnings season in the defense space with stable results.

(Read Defense Stock Roundup for Oct 28, 2014 for a recap.)

Iraq Update

As part of its proclaimed Inherent Resolve strategy, the U.S. and its allies conducted as many as 14 airstrikes against Islamic State (IS.V) forces in Iraq and in Syria over Saturday and Monday. The U.S. military forces carried out airstrikes near the key town of Kobani along the border with Turkey and near Dayr Az Zawr in Syria. In Iraq, nine strikes hit near the cities of Baiji, Fallujah and Rutba.

Although the war against IS could only mean good news for the defense and aerospace industries, which have already cashed in on the lingering crisis, western Iraq unfortunately saw more bloodshed this weekend after the IS massacred 322 people of the Albu Nimr tribe, a Sunni group, that includes women and children.

Recap of the Week’s Most Important Stories

1. A Lockheed Martin Unit − Lockheed Martin Aeronautics Co. of Fort Worth, TX − was awarded four big contracts in the past week. The company secured a $411.1 million modification contract for the repair and replenishment of government-owned F-35 fighters, including spare parts for the Navy, Marines, Air Force and international partners. Work is expected to be completed by Nov 2015. It was also awarded a $391.6 million contract to provide recurring sustainment support for delivered air systems for the F-35 program.

Lockheed Martin also received a $220.7 million modification contract for Israel’s F-35 System Development and Demonstration Phase I Increment 2. This modification includes the development and demonstration of the hardware and software for the Israel F-35A CTOL air system. Lastly, it received a $271.8 million modification contract to install 142 F-16S aircraft upgrade kits. Work will be performed in Taiwan and is expected to be completed by May 31, 2022.

Apart from winning these big ticket programs, the defense behemoth announced that it will acquire Systems Made Simple, a New York-based privately held company, which provides the U.S. government with health information technology (IT) solutions. The financial terms of the deal were not disclosed and the transaction is expected to close within 30 days (read more: Lockheed Martin to Diversify with Health IT Firm Acquisition).

2. As we near the end of the third-quarter earnings season for the defense sector, L-3 Communications Holdings reported in line earnings that fell from the year-ago level as internal review in its Aerospace segment negatively impacted results. The company also guided earnings per share lower for 2014 (read more: L-3 Communications Holdings Meets Q3 Earnings Estimates).

Another defense operator Rockwell Collins Inc. reported fourth-quarter as well as fiscal year 2014 earnings. Fiscal fourth-quarter earnings beat the Street consensus by 3.2% and improved 8.3% year over year. Although lower purchases by the defense agencies hurt the company’s sales to the government, its commercial operations helped boost overall sales by 15% year over year (read more: Rockwell Collins Q4 Earnings Beat Powered by Higher Sales). The company also won a $101.1 million contract for the procurement of AN/ARC-210 electronic protection radio equipment in support of domestic as well as foreign military sales (FMS) aircraft.

Alliant Techsystems Inc. (ATK) reported better-than-expected second-quarter fiscal 2015 results with earnings coming in 6.4% higher year over year on the back of improved sales. However, the company lowered the high end of its guided range for fiscal 2015 sales to $5.15–$5.20 billion from $5.15–$5.25 billion (read more: Alliant Techsystems (ATK) Beats on Q2 Earnings, Up Y/Y).

3. Diversified conglomerate United Technologies Corp. delivered strong third-quarter 2014 results riding high on a healthy margin improvement and the fifth consecutive quarter of organic sales growth (read more: United Technologies Marginally Beats on Q3 Earnings).

Pratt & Whitney – a unit of United Technologies − won a $793 million modification to the previously awarded contract from the U.S. military to provide the 8th lot of propulsion systems for the F-35 Lightning II JSF aircraft. This raised the total contract value to $1.05 billion. The contract calls for Pratt & Whitney Military Engines to produce 48 F135 engines and provide program management, engineering support and spare modules. This new contract is in addition to $259 million of preliminary funds already awarded and will cut the average cost of the engines between 3.5% and 4.5%.

4. The Boeing Co.'s (BA) Defense, Space, and Security division grabbed a $307.5 million Lot 18 JDAM tail-kits production contract from the U.S. Air Force. The production of Lot 18 tail kits is slated for completion by Oct 2016. Around 30% of the award includes unclassified FMS to support JDAM procurement for the United Arab Emirates, Morocco and Norway.

5. Newport News-based Huntington Ingalls Industries Inc (HII) doubled its quarterly cash dividend to 40 cents a share. This brings the annualized payout to $1.60 per share from its earlier dividend of 80 cents a share. Additionally, the company’s board of directors boosted its share repurchase program from $300 million to $600 million and extended the program’s deadline from Oct 31, 2017 to Oct 31, 2019.

Performance

In the past five trading days, all the major defense companies traded in the green. L-3 Communications Holdings Inc. gained the most with 4.03%, followed by Lockheed Martin.

In the past six months, the market reaction has been more or less optimistic. All the major defense companies have traded in the green barring Boeing.

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?

Huntington Ingalls Industries, Inc. will report third-quarter earnings on Nov 6, 2014.

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