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
Northrop Grumman Corp.
) turned out to be the clear winner, securing a $3.6 billion
contract from the Pentagon.
Lockheed Martin Corp.
) 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.
) share price continued to suffer, failing to win back investor
confidence in spite of a sizable defense order (see the last recap
Defense Stock Roundup for June 25, 2014
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
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
United Technologies Corp.
), 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
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
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
) 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
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
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.
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
General Dynamics Corp.
L-3 Communications Holdings Inc.
) 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
Last 6 months
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"
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
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RAYTHEON CO (RTN): Free Stock Analysis Report
GENL DYNAMICS (GD): Free Stock Analysis Report
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