Defense Stock Roundup: U.S.-Israel $38B Pact in Focus; Lockheed, Boeing Deal Wins Stand Out

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With the Federal Open Markets Committee (FOMC) set to declare its verdict today, speculations surrounding the U.S. Federal Reserve's decision to raise interest rates will be put to rest for now. Amid such speculations, the majority of the benchmark indices ended in the green last week.

A similar trend was observed in the major indices of the defense sector as well. Both the S&P 500 Aerospace & Defense (Industry) index and the Dow Jones U.S. Aerospace & Defense Index rose in the low-single-digits during the last five trading sessions, reflecting a slight improvement over the previous week's decline.

While the U.S.-Israel's $38 billion military aid deal caught everyone's attention, defense majors Lockheed Martin Corp. LMT , The Boeing Company BA , General Dynamics Corp. GD and L-3 Communications Holdings Inc. LLL bagged a number of important contracts from the Pentagon.

(Read Defense Stock Roundup for Sep 13, 2016 here .)

Recap of the Week's Most Important Stories

1. Pentagon's newly signed agreement to give the Israeli military aid of $38 billion over a 10-year period dominated the U.S. diplomatic and foreign policy agenda last week. This deal represents the largest ever military support pledged by the U.S. to another country. Israel will start getting the aid from 2019 through 2028, effective Oct 1, 2018.

Interestingly, the newly signed memorandum of understanding (MOU) includes terms and conditions that aim to direct the majority of the Israeli defense funds exclusively toward the U.S. companies. For instance, Israel has to spend as much as $1.2 billion per year on the advanced military equipment that only the U.S. can provide.

It's clear that this deal is intended to boost the profits of the prominent defense corporations in the U.S. In particular, U.S. defense primes Boeing and Lockheed Martin are expected to gain the most from this contract. Note that the deal calls for the supply of 33 Lockheed Martin F-35 fighter jets to Israel, of which the first two will be delivered this December and the last one is expected to be received around 2021. Boeing will also deliver 10 F-15 aircraft to Israel under this deal. (Read More: Lockheed, Boeing to Gain from $38B U.S.-Israel Defense Deal ).

2. Aircraft major Boeing' s Defense, Space and Security business division was awarded a foreign military sales (FMS) contract worth $700 million for the production of the Small Diameter Bomb Increment I (SDB I) weapons systems. As per the terms of the contract, the Air Force will supply SDB I weapons of Lot 12-14 and associated carriage systems.

Boeing's GBU-39/B Small Diameter Bomb (SDB) is a next-generation, low-cost and low collateral damage strike weapon system that can be deployed from both external and internal carriage systems. Being one of the largest defense contractors in the U.S., Boeing's SDB is one of the very few weapon systems of its kind available in the market (Read more: Boeing Wins $700M FMS Contract from Air Force for SDB I )

The company has also secured a modification contract worth $99 million for the acquisition of the Large Aircraft Infrared Countermeasures (LAIRCM) Block 30 hardware as contractor furnished equipment. As per the contract modification, Boeing will receive the LAIRCM Block 30 hardware for low-rate initial production of the Lot 1 and Lot 2 aircraft. Currently, this defense prime carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

The LAIRCM is an active anti-missile weapon to protect large aircraft. It has the ability to automatically detect a missile launch, determine if it is a threat and destroy it. The Block 30 LAIRCM configuration offers the most effective countermeasures against the Man-Portable Air Defense System (MANPADS) (Read more: Boeing Secures $99M Air Force Deal to Buy LAIRCM Block 30 ).

3. Defense giant Lockheed Martin continued to dominate the headlines throughout the week bywinning a number of contracts from the Pentagon. Here are the three most significant ones:

Lockheed's Rotary and Mission Systems business unit won a contract for the procurement of the DDG 116-118 Aegis follow-on support services. Valued at $157.4 million, this contract represents the completion of the development and fielding of the Baseline 9 Aegis Weapon System (AWS) and the Integrated Aegis Combat System on the remaining Aegis Technical Insertion 12 (TI 12)-configured destroyers as well as the TI 12 and TI 08-configured cruisers.

The contract includes options, which if exercised, would bring its cumulative value to $426 million.

Lockheed Martin's Aeronautics business division nabbed a modification contract, worth $136.6 million, for the low-rate initial production of Lot 10 air vehicle initial spares, including F-35 common spares; F-35A, F-35B and F-35C unique spares; and aloft spares packages/deployment spares packages. These spares will be delivered to the U.S. Air Force, Navy and Marine Corps; non-Department of Defense (DoD) customers; and through Foreign Military Sales. (Read more: Lockheed Martin Wins Two Major Contracts worth $294M )

The company won another deal worth $147.3 million from the Defense Advanced Research Projects Agency ("DARPA") for research work under the Tactical Boost Glide ("TBG") program. Per the contract, Lockheed Martin will conduct research on the hypersonic Mach 5 Tactical Boost Glide aircraft project.

The TBG program is a joint effort by the DARPA and the U.S. Air Force to develop technologies that facilitate the future production of air-launched, tactical-range hypersonic boost glide systems that run at five times the speed of sound and beyond (Read more: Lockheed Wins $147M Contract for Hypersonic Glide Systems ).

4. Another defense behemoth General Dynamics ' business unit, General Dynamics Electric Boat Corp., won two contracts from the Navy, worth a total $729.6 million. The first one is a modification contract, worth $329.6 million, to continue acting as a design agent, planning yard, and rendering engineering and technical support for active nuclear submarines.

Under the second contract, worth $400.0 million, General Dynamics will provide repair work for in-service nuclear-powered submarines, special mission submersibles, moored training ships and submarine support facilities.(Read more: General Dynamics Unit Wins 2 Navy Deals worth $730M ).

5. L-3 Communications ' Vertex Aerospace LLC won a modification contract, worth $163.3 million, from the Navy to provide support services. Per the modification, L-3 Communications will provide organizational, intermediate and depot-level maintenance and logistics services for about 200 T-45 aircraft at the Naval Air Stations (NAS) at Meridian, MS; Kingsville, TX; Pensacola, FL; and Patuxent River, MD.

Manufactured jointly by Boeing and BAE Systems plc (BAESY), T-45 is the Navy's advanced jet trainer for the Navy and Marine Corps with twin-seating capacity (Read more: L-3 Communications Secures $163M Navy Contract for T-45 ).

Performance

The major defense stocks have put up a mixed show over the past five trading sessions, with gains and losses balancing each other. Northrop Grumman Corp. NOC was the biggest gainer, while L-3 Communications lost the maximum, with a 0.6% dip.

For the past six months, most of the stocks in this sector have been on the rise, barring Rockwell Collins Inc. COL and Boeing. Notably, L-3 Communications gained the most, followed by Raytheon Company RTN .

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 1.29% 8.69%
BA 0.09% -5.94%
GD 1.35% 12.67%
RTN 0.75% 11.41%
NOC 1.58% 9.23%
COL 0.44% -11.50%
TXT -0.15% 7.01%
LLL -0.57% 23.82%

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NORTHROP GRUMMN (NOC): Free Stock Analysis Report

BOEING CO (BA): Free Stock Analysis Report

GENL DYNAMICS (GD): 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 Nasdaq, Inc.



This article appears in: Investing , Business , Stocks
Referenced Symbols: NOC , BA , GD , LMT , COL


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