Defense Stock Roundup: Pentagon OKs Sales to Iraq, Lockheed Seals More FMS Deals - Analyst Blog

FMS or the shorthand for Foreign Military Sales was the key for the defense sector last week with sales of $1 billion promised to Iraq. In spite of this, investors remained unimpressed as budget cuts continued to impact the order book of big contractors, leading to big sell-offs in many names. Yet, the sector is trying to plug the challenges with acquisitions and business diversifications besides boosting international orders.

Among the important updates last week, Pentagon's Defense Security Cooperation Agency has given the green signal for almost $1 billion of military hardware sales to Iraq. Lockheed Martin Corp. LMT – the largest defense contractor – seems to have gained the most from last week's DoD funding list, grabbing a chunk of various big as well as small ticket programs.

Again, Alliant Techsystems Inc. ATK came up with bright earnings results, surpassing the Zacks Consensus Estimate on both lines. Huntington Ingalls Industries, Inc. HII, originally an affiliate of Northrop Grumman Corp. NOC, now has plans to take over a provider of engineering and project management services, UniversalPegasus International, to diversify into the energy market.

Recap of the Week's Most Important Stories

1.    The Pentagon has cleared about $1 billion worth of light-attack planes, surveillance aerostats and up-armored Humvees for the Iraqi military. The major part of the deal comprises 24 Beechcraft AT-6C Texan II attack aircraft, associated equipment spares and repair parts and other support. The turboprop aircraft and related services and equipment are estimated to cost $790 million.

In the second part of this potential FMS contract, Iraq requested an estimated $101 million of M1151A Up-Armored Humvees and associated support. AM General will likely be the prime contractor for this award. Additionally, the deal also comprises the potential sale of aerostats and Rapid Aerostat Initial Deployment tower systems and associated support for $90 million. Raytheon Co. RTN will pick up this contract for seven 17-meter aerostats and 14 Rapid Aerostat Initial Deployment Tower systems and support.

2.    Lockheed Martin secured a handful of contracts in the past one week. The largest of these contracts was not surprisingly an FMS valued at $212.3 million for offering modification services to the Patriot Advanced Capability-3 (PAC-3) Missile Support Center to prominent customers like Japan, Taiwan, Germany, Netherlands, Kuwait, and the United Arab Emirates. Lockheed Martin Aeronautics Company won a $101.9 million modification contract from the DoD also under its FMS program (read more: Lockheed Martin Wins $101.9M DoD Contract).

3.    Alliant Techsystems reported fourth-quarter fiscal 2014 earnings results. Its adjusted earnings of $2.59 per share surpassed the Zacks Consensus Estimate by 7.9%. Quarterly earnings also surged 16.7% year over year, buoyed by higher revenues (read more: Alliant Beats Q4 Earnings & Revs).

4.    In a striking move, Huntington Ingalls, noted for its nuclear and non-nuclear submarines, has entered into a definitive agreement to acquire UniversalPegasus International Holdings or UPI. The latter is a provider of engineering and project management services to the domestic and international energy markets. The deal marks Huntington Ingalls' entry into the oil and gas market (read more: Huntington Ingalls to Buy UPI).

5.    General Dynamics Land Systems, a business unit of General Dynamics Corp. GD, won a $163 million contract from the U.S. Army TACOM Life Cycle Management Command to convert 93 flat-bottom Stryker infantry combat vehicles to a newer, more survivable double-V hull (DVH) design. The estimated delivery date for the Stryker DVH vehicles is Mar 2016.

Performance

Last week, shares of all defense biggies were in the red. The biggest loser was Rockwell Collins, down over 3.26% over the time frame. In the past 6 months frame, Textron is leading the way, with General Dynamics coming in a close second both gaining above 28%. The following table shows the price movement of the major defense players over the past 5 trading days and during the last 6 months:
 

What's Next in the Defense World?

Coming up this week, investor focus will be on Boeing's investor meet scheduled for May 21. We expect a flat-to-bearish trend in defense stocks seen in recent sessions to persist in the coming days as well.

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