Defense Stock Roundup: Northrop Scores Big, More U.S. Military Troops to Iraq - Analyst Blog

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Over the past five trading days, the U.S. Department of Defense (DoD) has poured in numerous contracts from its funding list. The sector appears to be busy with lofty government deals as well as acquisition activities. Still the major companies have continued to trade in the red.

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 $3.6 billion contract from the Pentagon. Lockheed Martin Corp. ( LMT ) was once again in the headlines with its second core space based system acquisition this year. Just as Pentagon strives to develop a more resilient space division to counter emerging security threats, the defense contractors specializing in space systems continue to gain from it.

However, Lockheed Martin's F-35 Joint Strike Fighter - the world's most expensive weapons system costing around $400 billion - came across an unexpected hurdle. The Boeing Co. 's ( BA ) share price continued to suffer, failing to win back investor confidence in spite of a sizable defense order (see the last recap here: Defense Stock Roundup for June 25, 2014 ).

Iraq Update

On Jun 30, President Obama ordered the sending of approximately 200 American troops to Iraq to reinforce security at the U.S. Embassy in Baghdad and the Baghdad International Airport, as fighting saw no respite this past week in the war-ravaged country. 100 additional personnel are also due to move to Baghdad to "provide security and logistics support." With this, the total strength of American forces in Iraq comes to about 800 troops.

Washington is also considering putting up a new joint military operations center in northwest Iraq's semi-autonomous Kurdish region that would be the second the U.S. has established since Iraq's security deteriorated earlier in Jun 2014. Though not yet finalized, the new operations center could be in the province of Duhok, in Iraq's northern reaches near Syria and Turkey.

Over the week, the al-Qaeda connected Sunni militant group, the Islamic State in Iraq and Syria (ISIS) declared the establishment of a caliphate, meaning an Islamic state, spanning large areas of the two countries - from northwestern Syria to the Diyala province in eastern Iraq.

Ominously, the insurgents are reportedly pushing toward the capital city of Baghdad. With the possibility of rising aggression in Iraq, the defense stocks may see some quick gains.

Recap of the Week's Most Important Stories

1.    The most significant award went to Los Angeles based defense contractor Northrop Grumman, which received a multi-year contract worth $3.6 billion from the U.S. Navy to supply 25 new E-2D Advanced Hawkeye aircraft (read more: Northrop Grumman to Supply E-2D Advanced Hawkeye to U.S. Navy )

2.    Boeing grabbed a $1.94 billion fixed-price-incentive-fee contract for the full rate production of 11 Lot 38 F/A-18E aircraft for the U.S. Navy as well as 33 EA-18G aircraft for the U.S. Navy and the government of Australia. This defense behemoth is also strengthening its portfolio. Recently, Boeing acquired a hardware and software engineering company - Ventura Solutions Inc. - for an undisclosed amount. Ventura provides custom solutions for government customers, thereby enhancing Boeing's information and security capabilities.

3.    Sikorsky Aircraft Corp., a unit of diversified conglomerate United Technologies Corp. ( UTX ), secured a $1.28 billion contract to develop new combat search and rescue helicopters for the U.S. Air Force (read more: Sikorsky Wins $1.28 Billion US Air Force Contract ).

4.    Lockheed Martin - Pentagon's prime contractor - continued its efforts to bolster its Space Systems unit. The company announced the acquisition of Fairfax-based Zeta Associates Inc., marking its fourth acquisition deal in the last few months (read more: Lockheed Martin Expands its Space Systems Unit )

In a separate development, Lockheed Martin's F-35 fighter jets faced a setback last week. The Air Force, Navy and Marine Corps have grounded all F-35 flights. The order was issued following an emergency at Eglin Air Force Base in Florida on Jun 23, when a fire in the rear of one plane compelled the pilot to terminate a takeoff. Initially only F-35A flights at Eglin were grounded, but later major commands, including Air Force Education and Training Command, Air Combat Command and Air Force Materiel Command have decided to stop F-35A flights while the investigation continues.

5.    Defense contractor Raytheon Co. 's ( RTN ) Missile Systems division won a good many contracts lately. One of the notable wins comprised a $275.4 million contract modification to supply the U.S. Navy with an unspecified number of Standard Missile 6 (SM-6) all-up rounds, as well as an unspecified number of spare SM-6 and Standard Missile 2 (SM-2) rounds, and containers (read more: Raytheon Secures a Flurry of DoD Deals ).

Again, the defense department awarded Raytheon's Missile Systems division a $223.1 million contract to provide 485 new Sidewinder Missiles for the U.S. Navy, the U.S. Air Force as well as for the governments of Singapore, the Netherlands, Kuwait and Turkey (read more: Raytheon Wins Three Back-to-Back DoD Deals ). The company's Integrated Air Defense Center won a $235.5 million foreign military sales contract to upgrade patriot radar processors for the U.S., Kuwait and the Netherlands.

Performance

Despite important deals won from the Pentagon in the past one week, shares of all defense biggies were in the red. The biggest loser was Raytheon, dropping 3.83% over the time frame, with Boeing following suit. In the past six months, the companies have reported in the green (except for Boeing), though they are gradually losing their momentum.

General Dynamics Corp. ( GD ), L-3 Communications Holdings Inc. ( LLL ) and Lockheed Martin registered double-digit share price growth, with GD leading the way. All the other biggies have reported single-digit share price appreciation in the last six-month time fame while Boeing is slowly losing its spot with a telling 6.91% decline. 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

-2.03%

+10.04%

BA

-2.68%

-6.91%

GD

-1.63%

+23.01%

RTN

-3.83%

+3.91%

NOC

-2.26%

+5.65%

COL

-1.35%

+6.88%

TXT

-2.18%

+5.51%

LLL

-2.08%

+14.91%



Other Stories You May Have Missed

•    Last week, the fiscal year 2015 Department of Homeland Security (DHS) Appropriations bill received the green signal from the Senate Appropriations Committee. The bill provides funding to strengthen the U.S. Homeland Security efforts, which comprises border security, laws enforcement, protection against cyber threats, reinforcing counternarcotic efforts, responding to natural disasters, and fighting terrorism. We note that the House Appropriations Committee had already passed the bill on Jun 12.

The bill provides $39.2 billion in discretionary funding to DHS. Although this represents a decrease of $50 million from the fiscal year 2014 enacted level and an 8.3% decline since fiscal year 2010, it still marks an increase of $887.8 million from the President's request for these programs.

•    The White House announced last week that President Obama has requested $58.6 billion for DoD Overseas Contingency Operations (OCO) for fiscal year 2015. The enacted OCO funding in fiscal year 2014 was $85.3 billion. The OCO fund is essentially government-speak for foreign wars and "war on terror" operations.

What's Next in the Defense World?

Although the Pentagon maintained its order flow, the easy upward slope of last year is likely to hit a plateau. The ongoing Iraqi civil war, escalating tensions in Eastern Europe and demand for defense products in the Middle East and other Asian nations still keep the hope alive.

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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NORTHROP GRUMMN (NOC): Free Stock Analysis Report

BOEING CO (BA): Free Stock Analysis Report

RAYTHEON CO (RTN): Free Stock Analysis Report

GENL DYNAMICS (GD): Free Stock Analysis Report

L-3 COMM HLDGS (LLL): Free Stock Analysis Report

UTD TECHS CORP (UTX): Free Stock Analysis Report

LOCKHEED MARTIN (LMT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: ISIS , DHS , NOC , BA , RTN

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