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Defense Stock Roundup: Lockheed Wins Lot IX F-35 Contract, Huntington Ingalls Q3 Earnings Impress

The Pentagon's prime contractor, Lockheed Martin LMT , scored big last week with its preliminary contract for the ninth batch of F-35 jets for the U.S. military and its allies.

While Northrop Grumman NOC was celebrating the multi-billion dollar contract for the Long Range Strike-Bomber ("LRS-B"), Boeing BA and Lockheed Martin filed a formal protest with the Government Accountability Office ("GAO") against the award.

Meanwhile, the largest shipbuilder in the U.S., Huntington Ingalls Industries HII , reported solid third-quarter results, driven by strong performance at its Gulf Coast operation.

(Read Defense Stock Roundup for NOV 3, 2015 here.)

2016 Defense Bill: The Bipartisan Budget Act of 2015 has not only prevented a government shutdown and lifted the debt limit, it has increased both defense and domestic spending above the so-called "sequestration" spending caps. With this, it has resolved the President's main opposition to the National Defense Authorization Act ("NDAA") that led to his veto of the annual defense policy bill last month.

Under details of the "Bipartisan Budget Act," the caps on defense spending were raised by about $25 billion for each of the next two fiscal years, to $548 billion in fiscal 2016 and $551 billion in fiscal 2017. It also provided $58 billion in funding for the Pentagon's separate war fund, the overseas contingency operations ("OCO") fund.

However, the total defense top line for fiscal 2016 is about $5 billion short of the original White House budget request and the Republican congressional budget resolution. The Congress had earlier wanted $612 billion but settled for $607 billion as part of a budgetary agreement with the White House. Instead of overruling the President's veto of the defense bill, the Congress opted to cut $5 billion in defense spending authorized by the NDAA in line with the budget deal.

Overall, the new budget deal provided the Pentagon with a two-year budget certainty. This is especially important as defense programs require long-term strategic planning and multi-year acquisition contracts. Again, the agreement gives the military a higher budget than it would have witnessed under the spending caps. This provides some respite following six consecutive years of budget austerities.

Recap of the Week's Most Important Stories

1. Lockheed Martin has nabbed a preliminary contract valued at up to $5.37 billion from the U.S. Navy to build the ninth batch of F-35 jets for the U.S. military and its allies. The full Lot IX contract will be for a total of 55 aircraft, including 41 F-35A conventional ground-based aircraft − 26 for the U.S. Air Force, 6 for Norway, 7 for Israel and 2 for Japan. Twelve F-35B Short Takeoff and Vertical Landing aircraft were ordered, six for the U.S. Marine Corps and six for the U.K. Another two F-35C carrier-based variants were ordered for the U.S. Navy. All Lot IX aircraft are scheduled to be delivered by the end of 2017.

Per an "undefinitized contractual action" or "UCA" agreed last Tuesday, $625 million of fiscal 2015 money is being allocated to Lockheed to cover expenses incurred so far on the Lot IX aircraft. The full contract is being negotiated under a not-to-exceed limit of $5.37 billion.

Meanwhile, the U.S. Air Force has awarded Lockheed Martin a $262.8 million contract to sustain sensor suites for Saudi Arabia's F-15 fleet. Sensor suite upgrades will include Sniper Advanced Targeting Pods, Infrared Search and Track Systems, and LANTIRN Extended Range navigation pods. Per the contract, Lockheed Martin will work with Advanced Electronics Company to perform sustainment services for the sensor suites.

2. In a separate business development, Lockheed Martin has now closed the $9 billion acquisition of United Technologies' (UTX) Sikorsky helicopter unit. Last week, the deal cleared its final regulatory hurdle, receiving approval from the Ministry of Commerce in China, the last of eight jurisdictions to approve the acquisition.

3. Huntington Ingalls Industries reported third-quarter 2015 results wherein its top and bottom line beat the Street expectations. The shipbuilder's quarterly adjusted earnings per share advanced 19.9% year over year, driven by strong performance at its Gulf Coast operation (read more: Huntington Ingalls Beats Q3 Earnings on Higher Sales ).

4. The Boeing Co. has agreed to pay $57 million to settle a nearly decade-old class action lawsuit that accused the aerospace behemoth of mishandling its 401(k) plan. The case was a class action lawsuit on behalf of 190,000 existing and retired Boeing employees alleging that the company failed to fulfill fiduciary responsibility toward those employees. The case accused Boeing of allowing 401(k) fees to go unchecked, choosing higher retail mutual funds over cheaper options and making planned decisions that benefited vendors receiving other company business (read more: Boeing to Pay $57 Million to Settle 401(k) Lawsuit ).

Meanwhile, Boeing has received a $124.6 million foreign military sales contract from the U.S. Navy to produce Harpoon weapon systems for international customers, comprising Saudi Arabia, Australia, Japan, Korea, India, Turkey, Belgium, Brazil, Egypt, Kuwait, Canada and Taiwan. These foreign allies intend to purchase 53 Harpoon systems, components and Standoff Land Attack Missile - Expanded Response weapon services, per the U.S. Department of Defense. Boeing is slated to complete the production by Jun 2017.

5. Two of the world's largest defense contractors, Boeing and Lockheed Martin, have filed a protest with GAO against the U.S. Air Force's contract with Northrop Grumman, alleging that the selection process was "fundamentally flawed."

Boeing and Lockheed Martin teamed up to bid for the U.S. Air Force's contract to build the new LRS-B, which has a potential value of about $100 billion. However, the partnership lost the bid after the contract was awarded to Northrop last week (read more: Boeing and Lockheed File Protest over Long Range Bomber Contract ).

Performance

In the last five trading days, share prices of the major defense companies showed weak performances with all ending in the red zone. Northrop Grumman lost the most, followed by L-3 Communications Holdings LLL .

In the last six months, the picture, however, seems to be a little reassuring with more gains than losses. Although share prices of Rockwell Collins COL and Textron TXT ended in the red, others were in the green. Northrop Grumman gained the most with 17.37%.

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 -1.92% 14.44%
BA -0.82% 1.62%
GD -1.96% 2.86%
RTN -0.96% 11.20%
NOC -2.67% 17.37%
COL -1.54% -10.17%
TXT -2.00% -8.73%
LLL -2.46% 4.79%

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

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

LOCKHEED MARTIN (LMT): Free Stock Analysis Report

HUNTINGTON INGL (HII): 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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