Defense Stock Roundup: Northrop Scores Big, Lockheed Keeps Winning - Analyst Blog

Combating the ongoing sequester, almost all major defense companies reported in the green over the last five trading days. Big defense firms have been able to grab big ticket programs from the U.S. Department of Defense (DoD) while Foreign Military Sales FMS still remained its key tool.

Among the important updates in the past one week, Los Angeles-based defense contractor Northrop Grumman Corp. NOC turned out to be the clear winner, securing a $9.9 billion contract from the Pentagon. The #1 contractor – Lockheed Martin Corp. LMT – proved yet again its dominance, securing a nice mix of big and small contracts from the DoD funding list (see the last recap here: Defense Stock Roundup for June 3, 2014).

Recap of the Week's Most Important Stories

1.    The most significant award went to Northrop Grumman, builder of the B-2 Spirit bomber, better known as the B-2 Stealth Bomber. The company received a mega contract, worth $9.9 billion, from the U.S. Air Force to offer modernization and support services to the B-2 stealth bomber program (read more: Northrop Clinches $9.9B DoD Contract).

2.    Lockheed Martin, in a deal valued at $1.9 billion, delivered an F-16 fighter jet to Iraq, the first of 36 that the country ordered over 2011 and 2012. Production is expected to continue through 2017. The contract also includes mission equipment and support package to be delivered by Lockheed Martin and other U.S. and international contractors. Iraq joins 27 other nations around the world in utilizing the F-16 Fighting Falcon. This program celebrates its 40th year of evolution with deliveries over 4,540 F-16 aircraft made to date.

3.   The Pentagon has cleared a contract, worth $452.0 million, for Lockheed Martin Space Systems Co. to provide reentry system/reentry vehicles (RS/RV) subsystem support as well as procure MMIII RS/RV subsystem and related support equipment. In a contract modification worth $134.2 million, Lockheed will provide highly specialized services related to Ballistic Missile Defense System flight tests at several contractor-owned facilities and government test sites (read more: Lockheed in Contract Winning Spree)

4.    Again, Lockheed Martin Aeronautics Company, a key Lockheed division, received a modification contract worth $122.1 million from the DoD for the procurement of initial aircraft spares for the F-35 Lightning II Joint Strike Fighter aircraft (read more: Lockheed Wins F-35 Procurement Contract).

5.    Diversified conglomerate United Technologies Corp.'s UTX two business units – Pratt & Whitney and Sikorsky Aircraft – also made it to last week's headlines. Pratt & Whitney won a contract modification that calls for maintenance of Low-Rate Initial Production Lot VIII F135 propulsion systems, which are the engines powering the in-vogue F-35 fighter jets (read more: UTX Wins Federal Contracts).

Performance

Shares of all defense biggies were in the green in the past one week. The biggest gainer L-3 Communications Holdings Inc. LLL rose 4.40% over the time frame. In the past 6 months, General Dynamics Corp. GD has led the way, with Textron Inc. TXT following suit. The following table shows the price movement of the major defense players over the past 5 trading days and during the last 6 months:
 

Other Stories You May Have Missed

Apart from the top five developments in the defense sector discussed above, President Obama announced a $1 billion fund to beef up defensive capabilities of new allies in Eastern Europe. The “European Reassurance Fund” will look to bolster the capability, readiness, and receptiveness of North Atlantic Treaty Organization (NATO) forces to deal with continued threats in the region.

The program, unveiled in Poland, includes Georgia, Moldova and Ukraine. This initiative reaffirmed Obama's commitment to Europe following months of tensions surrounding the February expulsion of Ukraine's pro-Russian president Viktor Yanukovych. This fund will be included in the Obama administration's fiscal 2015 war-fighting request, i.e., the Overseas Contingency Operations (OCO) Fund. The OCO fund is essentially government-speak for foreign wars and "war on terror" operations.

What's Next in the Defense World?

The aerospace and defense sector is getting accustomed to budget cuts and the easy upward slope of last year is likely to hit a plateau. While the word “sequester” rang an ominous bell for the defense industry last year, the sector is holding up well this year. Moreover, escalating tensions in Eastern Europe and demand for defense products in the Middle East and other Asian nations may keep demand alive.

We remind investors that the Zacks Industry Rank for aerospace/defense is within the top one-third of the list of 260-plus industries. Hence, the prospects for this industry are still very much in place. We, however, expect the slightly flat-to-bearish run of the defense stocks to persist in the coming days (To know more please see: Zacks Industry Rank).

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