Defense Stock Roundup: Q2 Earnings Show Beats from Top Players - Analyst Blog

Last week, the second-quarter 2015 earnings season took off in the defense corner with its two heavy weights, Lockheed Martin Corp. LMT and The Boeing Co. BA, surpassing estimates.

Lockheed Martin clearly stole the limelight not only with its earnings beat but also with two strategic announcements and a big foreign contract win. This prime defense contractor will become an even bigger aerospace powerhouse as it scoops up Black Hawk helicopter maker Sikorsky Aircraft from United Technologies UTX for $9 billion in cash.

Raytheon Co. RTN and Rockwell Collins Inc. COL also surpassed the Street expectations with year-over-year gains.

(Read Defense Stock Roundup for Jul 15, 2015 here.)

Recap of the Week’s Most Important Stories

1.    The Pentagon’s prime contractor opened this earnings season with robust second-quarter profits. Its earnings easily beat the Zacks Consensus Estimate by 10.1% and increased 6.5% year over year. Revenues also edged up 2.7% in the quarter, beating analysts’ expectations by 5.5%. The solid first half performance has also enabled it to lift its 2015 outlook for operating profit and earnings (read more: Lockheed Beats on Q2 Earnings, Projects Higher 2015 Profit).

Apart from reporting solid second-quarter results, Lockheed Martin announced two strategic moves – a spin-off or sale of its government IT and technical services businesses and the acquisition of Sikorsky for $9 billion – to strengthen its competitive position. The takeover of Sikorsky opens key foreign markets for Lockheed extending its core operations into the $30 billion annual military and commercial rotary wing segment (read more: Lockheed Martin Acquires Black Hawk Helicopter Maker).

The company is also not devoid of big wins. Lockheed Martin nabbed a foreign military sales contract worth $1.56 billion to provide Korea, Qatar, Saudi Arabia, Taiwan and the United Arab Emirates with an unspecified number of Patriot surface-to-air missiles and equipment and spare parts. The contract runs through Jun 2018.

2.    Boeing beat analysts’ expectations with its second-quarter earnings on the back of rising demand for its fuel-efficient commercial planes. Revenues in the quarter rose 11% mostly due to faster production of its commercial planes. The company’s cash flow also surged 82% in the quarter.

However, Boeing saw its second-quarter earnings plunge 33% owing to repeated delays with a military fuel tanker. The company incurred a post-tax charge of $536 million or 77 cents per share for problems related to its $35 billion tanker program for the U.S. Air Force. The charge reflects higher engineering and manufacturing costs to complete the development, certification and initial production of the KC-46 tanker.

Owing to this, the company lowered its adjusted or core earnings per share guidance to the range of $7.70−$7.90 per share from its earlier projection of $8.20−$8.40 for 2015.

In a separate business development, Boeing has named Mark Jenks as the new Chief of its 787 Dreamliner program. He will replace Larry Loftis who will retire at the end of this month after 35 years of serving the company. Jenks will become vice president and general manager of Boeing’s flagship 787 program (read more: Boeing Co 787 Dreamliner Team Gets New Chief).

3.    Industrial behemoth United Technologies Corp. has posted mixed second-quarter 2015 results, beating the Zacks Consensus Estimate for earnings, while missing on revenues. Moreover, the company has cut its 2015 profit forecast on weak demand for aerospace parts and Otis elevators.

Its top line also decreased 5% year over year due to China weakness and a strong dollar. United Technologies has reached an agreement to sell off its Sikorsky Aircraft business to Lockheed Martin for $9 billion in cash, subject to regulatory approvals. The deal will enable United Technologies to exit the helicopter business and focus on its primary business lines of high technology systems and services for the aerospace and building industries.

4.    Raytheon Co’s second-quarter earnings surpassed the Street expectation and rose 3.8% year over year buoyed by higher revenues and the favorable impact of a tax settlement. The company said its $1.9 billion acquisition of Websense, a cybersecurity firm, should be accretive to earnings in two to three years, instead of its earlier expectation of three to four years.

International bookings were particularly strong, representing 44% of the total while total backlog at the end of the quarter was $34.5 billion (up from $33.57 billion at 2014 end). Operating cash flow from continuing operations in the second quarter increased 145.8% year over year. Raytheon raised its revenue expectation as well as the lower end of the 2015 operating cash flow guidance. The company, however, trimmed its earnings outlook to account for costs related to the Websense deal (read more: Raytheon Tops Q2 Earnings, Cuts View on Websense Deal).

The missile maker has been awarded a $180.4 million contract to build Unitary Joint Standoff Weapon missiles and related equipment and support services for the U.S. Navy and the Saudi Arabian military. The contract includes full-rate production of 200 AGM-154C-1 JSOWs for the U.S. and 355 AGM-154 Block III C missiles for Saudi Arabia.

5.    Rockwell Collins Inc., the avionics and aircraft systems manufacturer, reported an 11.8% rise in quarterly profit which came in above the Street expectation by 1.5%. Weak commercial aftermarket sales were partially offset by strong third-quarter sales of avionics and communications equipment for new aircraft. The company has also narrowed its forecast for full-year earnings (read more: Rockwell Collins Beats Q3 Earnings, Narrows 2015 Outlook).

Performance

In the last five trading days, all the major defense companies have traded in the red barring Raytheon, in spite of the earnings beat by the top players. Rockwell Collins lost the most, followed by Textron.  

The six-month picture is nonetheless mixed as major companies witnessed share price appreciation. However, L-3 Communications Holdings Inc. LLL, Rockwell Collins and Textron ended in the red.

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

Company	Last Week	Last 6 months
LMT	-0.97%	7.19%
BA	-2.74%	7.80%
GD	-2.65%	4.84%
RTN	6.63%	0.88%
NOC	-2.52%	7.27%
COL	-6.15%	-2.64%
TXT	-5.88%	-1.94%
LLL	-1.28%	-3.38%

What’s Next in the Defense World?

General Dynamics Corp. GD, Northrop Grumman Corp. NOC and Spirit AeroSystems Holdings, Inc. are slated to report their second-quarter 2015 results on Jul 29, 2015.

L-3 Communications is scheduled to report its quarterly result on Jul 30, 2015.

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NORTHROP GRUMMN (NOC): Free Stock Analysis Report
 
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