Market Overview

Short Interest Swings in Defense Stocks (FLIR, GD, HXL)

The short interest in defense companies was mixed during the weeks leading up to the federal budget sequester.

The number of shares sold short in Alliant Techsystems (NYSE: ATK), Boeing (NYSE: BA), L-3 Communications (NYSE: LLL), Northrop Grumman (NYSE: NOC), Raytheon (NYSE: RTN), Textron (NYSE: TXT) and United Technologies (NYSE: UTX) increased somewhat between the February 15 and February 28 settlement dates.

But short interest in Esterline Technologies (NYSE: ESL), HEICO (NYSE: HEI), Huntington Ingalls (NYSE: HII), Rockwell Collins (NYSE: COL) and TransDigm (NYSE: TDG) declined during that time.

Three defense companies saw larger swings in short interest between the February 15 and February 28 settlement dates. They were FLIR Systems (NASDAQ: FLIR), General Dynamics (NYSE: GD) and Hexcel (NYSE: HXL).

FLIR Systems

Shares sold short in this manufacturer of thermal imaging systems retreated about 16 percent to about 2.17 million, taking back some of the gain of 31 percent in the previous period. The end of February figure was still the second highest level of short interest since October. The short interest was less than two percent of the total float.

This Oregon-based company has a market capitalization of about $3.8 billion and a dividend yield near 1.4 percent. It posted better-than-expected earnings in the most recent quarterly report, but its revenues fell short of estimates. FLIR Systems' long-term earnings per share (EPS) growth forecast is more than 12 percent. The price-to-earnings (P/E) ratio is greater than the industry average, but so is its operating margin.

But of the 11 analysts who follow the stock that were surveyed by Thomson/First Call, four recommend buying shares and just one rates the shares at Underperform. The analysts' mean price target indicates upside potential of more than nine percent. But that target is about the same as the recent 52-week high.

The share price is up more than 12 percent year to date, most of that coming in a surge following the earnings report. Shares are trading in the same neighborhood as a year ago. But over the past six months, the stock has outperformed competitor L-3 Communications and the broader markets.

General Dynamics

This Falls Church, Virginia-based aerospace and defense company saw short interest jump more than 33 percent in late February to more than 5.26 million shares, the greatest number of shares sold short in at least a year. Short interest was less than two percent of the float.

General Dynamics won a number of military contracts in later February, before the sequester became official. The company currently has a market cap of about $24 billion and a dividend yield near three percent. Note that the long-term EPS growth forecast is around seven percent and the return on equity is in negative territory.

Out of 20 analysts polled, 13 recommend buying shares, six of them rating shares at Strong Buy. Their mean price target, or where they expect the share price to go, represents about eight percent potential upside, relative to the current share price. That target would be a new 52-week high.

The share price is down less than four percent year to date but has climbed about four percent in the past month. The stock has underperformed Boeing and Textron over the past six months, as well as the S&P 500.

Hexcel

Short interest in this composite materials and engineered products maker increased more than 17 percent in the period to 5.02 million shares, returning to about the same level of short interest as at the mid-January settlement date. The end of February figure represents about five percent of the company's float.

In late February, a senior vice president sold more than 34,000 shares of this manufacturer of lightweight and high-performance structural materials for use in commercial aerospace, space and defense, and industrial applications. The company has a market cap near $2.8 billion. The long-term EPS growth forecast is about 12 percent, and the return on equity is more than 18 percent.

The consensus recommendation of 14 surveyed analysts is to buy the shares, and it has been for at least three months. They believe the shares have some room to grow, as their mean price target is more than nine percent higher than the current share price. That target would be a level shares have not seen since 1998.

The share price is more than 18 percent higher than six months ago, including a more than four percent pop in the past week. The stock has outperformed competitors such as Cytec Industries (NYSE: CYT) over the past six months.

Posted-In: alliant techsystems Boeing Cytec Industries esterline technologies FLIR SystemsLong Ideas Short Ideas Trading Ideas Best of Benzinga

 

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