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Defense Stock Roundup: Boeing & Lockheed Joint Venture Sale in Dilemma; Sundry FMS Contracts for Players

The three-month period − between August and October − is generally noted for its sluggishness in the markets. This instability was also widely seen in the defense stock performance over the past few weeks. Having said that, the sector did not lack in dynamism with the latest buzz being the Aerojet Rocketdyne Holdings Inc.'s AJRD bid for United Launch Alliance.

Among the important highlights over the last five trading days, Lockheed Martin Corp. LMT - Pentagon's prime contractor - announced plans to retrench workers at its Information Systems & Global Solutions unit. The company also sealed a major foreign military sales (FMS) contract with the Polish Air Force. Rockwell Collins COL was selected by Sikorsky Aircraft to provide avionics and mission equipment for the U.S. Air Force Combat Rescue Helicopter ("CRH") program.

(Read Defense Stock Roundup for Sep 8, 2015 here.)

Recap of the Week's Most Important Stories

1. The $2 billion bid by a leading U.S. rocket engine manufacturer, Aerojet Rocketdyne Holdings Inc., to acquire United Launch Alliance or ULA, a joint venture ("JV") of Boeing Co. BA and Lockheed Martin Corp. is running into complications, as Boeing seems reluctant to sell its 50% stake in the JV, per a Wall Street report.

Boeing said that it remains "committed to [United Launch] and its business," which it called "the most reliable and effective way to ensure access to space for a wide range of government customers."

Although Boeing and Lockheed Martin declined to comment on the deal, ULA is facing intense competition to retain its premier position as the supplier of rockets to the Pentagon.

Meanwhile, ULA took a surprising step of speeding up rocket engine work with Amazon.com Inc. founder Jeff Bezos' space company. Last year, ULA and Bezos' space venture, Blue Origin, had expressed willingness to jointly develop a liquid natural gas-fueled rocket engine to replace Russian-made RD-180 engines that currently power ULA's workhorse Atlas 5 booster.

At the same time, Aerojet Rocketdyne had planned to adapt its new AR-1 engine for the Atlas 5 rocket, replacing the Russian-built RD-180 engine (read more: Is Boeing and Lockheed's Rocket Joint Venture Up for Sale? ).

2. Lockheed Martin announced plans to lay off "approximately 500" workers at its Information Systems & Global Solutions ("IS&GS") segment by mid-November due to a shift in government priorities and changing industry dynamics. The layoff will also sharpen the segment's competitive edge.

Although the company will have to book one-time charges for severance and restructuring this financial year, it will lead to savings from next year. Resultantly, 2016 results should look much stronger in comparison to fiscal 2015 (read more: Lockheed's IT Business to Reduce Employee Count by 500 ).

3. Lockheed Martin in a separate development announced that it has been selected for selling 40 of its Joint Air-to-Surface Standoff Missiles (JASSM) to the Polish Air Force. These missiles are to be used on Poland's F-16 fleet. This eastern European country is Lockheed's third international customer for the missiles.

The contract for the air-to-ground cruise missiles comes as a result of a U.S. FMS deal with Poland announced last September. That deal, valued at $500 million, encompassed 40 AGM-158 JASSM missiles and upgrades to the aircraft. It called for Lockheed Martin to provide hardware, software, docs and program management along with 40 missiles.

4. Northrop Grumman Corp.NOC has entered into a maintenance agreement with the U.S. Air Force for the latter's fleet of B-2 stealth bombers. This will not only save the Air Force $900 million but also make one more jet available for use at any given time.

Per the modification contract that was signed in April, Northrop will modify each B-2, under a process called programmed depot maintenance, including a complete restoration of the jet's exterior surface, once every nine years, instead of the current seven-year cycle.

The B-2 bombers are loaded with stealth technology allowing it to sneak past enemy anti-aircraft defenses thereby avoiding detection. It is also designed to carry heavy arsenals including nuclear bombs.

5. Rockwell Collins has been selected by the sub-contractor Sikorsky Aircraft to provide avionics and mission equipment for the U.S. Air Force CRH program. This includes the cockpit flight and mission display system, navigation radios and the advanced ARC-210 V/UHF communication system. Sikorsky's CRH engineering and manufacturing development contract, awarded in Jun 2014, comprises options to field a total of 112 HH-60W helicopters and could be worth as much as $8 billion over the life of the program. This will replace the U.S. Air Force's aging fleet of HH-60G helicopters.

6. Boeing Co. secured a $131.3 million modification contract for the previously awarded CH-47F helicopter order from Turkey. This FMS contract is slated for completion by Dec 31, 2020.

Performance

In the last five trading days, share prices of all the major defense companies showed lukewarm performances with most of them ending in the red. Though the shares of Boeing, Rockwell Collins and Textron TXT appreciated, they showed muted growth of less than 1%.

In the last six months, the picture remains mixed with a touch of disappointment. Although share prices of Lockheed Martin, General Dynamics, Raytheon and Northrop Grumman ended in the green, Boeing, Rockwell Collins, Textron and L-3 Communications lost the battle.

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 -0.49% 6.11%
BA 0.46% -10.17%
GD -2.59% 7.47%
RTN -1.01% 0.29%
NOC -0.11% 7.58%
COL 0.29% -9.53%
TXT 0.20% -5.71%
LLL -1.10% -14.31%

What's Next in the Defense World?

In the next five days, no major development is lined up on the defense front. We note that defense stocks have been experiencing volatility with gains and losses in recent months and investors can expect this volatile movement to continue in the coming days as well.

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NORTHROP GRUMMN (NOC): Free Stock Analysis Report

TEXTRON INC (TXT): Free Stock Analysis Report

BOEING CO (BA): Free Stock Analysis Report

ROCKWELL COLLIN (COL): Free Stock Analysis Report

LOCKHEED MARTIN (LMT): Free Stock Analysis Report

AEROJET ROCKETD (AJRD): 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.


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

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