Majority of the benchmark indices ended in the green last week in response to Fed Chairwoman Janet Yellen's comments which hinted that possibilities of a rate hike have gained strength in recent months. Although this did not spur a positive rebound in the defense sector's major indices, flattish trends in the S&P 500 Aerospace & Defense (Industry) index and the Dow Jones U.S. Aerospace & Defense Index in the last five trading sessions surely signal some improvement over the past declines.
Among the highlights, defense prime Lockheed Martin Corp.LMT stayed in the limelight, winning a string of contracts from the Department of Defense's ("DoD") daily funding session. Northrop Grumman Corp.NOC also clinched an important contract, while Textron Inc. 's TXT hit the market with a novel restructuring initiative announced by its management.
Recap of the Week's Most Important Stories
1. Pentagon's prime contractor, Lockheed Martin's Sikorsky was awarded a modification contract worth $158.4 million by the U.S. Army for exercising an option for 14 UH-60M helicopters. The contracting activity is the Army Contracting Command, Redstone Arsenal, AL and work is expected to be complete by Jun 30, 2017 (Read more: Lockheed's Sikorsky Wins Black Hawk Defense Deal ).
The company also won another modification contract from the Army for the sale of 24 units of the same chopper to the Taiwan government. This contract is worth $135.4 million and the contracting activity is the same as above. Work is scheduled to be complete by Oct 8, 2018 (Read more: Lockheed's Sikorsky Wins $135M Deal for 24 Black Hawks ).
Notably, UH-60M is a modified version of the renowned Black Hawk family of helicopters that supports multi-mission tactical operations. It is a twin-engine copter with four blades, superior vertical lift and an improved durability gearbox. This medium-lift utility chopper offers fail-safe service, during both day and night, in the harshest weather conditions, anywhere in the world.
Meanwhile, Lockheed Martin's Mission Systems and Training unit has won a modification contract worth $204.3 million from the DoD for the development of the Aegis Ballistic Missile Defense (ABMD) 5.1 system and the adaption of Aegis Ashore. ABMD is the naval component of the U.S. Missile Defense Agency's Ballistic Missile Defense System (BMDS) and its Baseline 5.1 version will incorporate the SM-3 Block IIA - a new high-speed missile co-developed by the U.S. and Japan.
On the other hand, Aegis Ashore is the first operational land-based version of the Aegis Combat System, aimed at offering affordable solutions to expand the protection of the Aegis Combat System to inland areas. The contract was awarded by the Missile Defense Agency, Dahlgren, VA. Work is scheduled to be completed by Sep 30, 2017 (Read more: Lockheed Martin Wins $204M Deal for Aegis BMD 5.1 ).
2. Another defense giant, Northrop Grumman's Electronic Systems, won a fixed-price-incentive contract from the U.S. Navy for procuring 9 Ground/Air Task-Oriented Radar (G/ATOR) low-rate initial production systems. Valued at $375.6 million, this contract was awarded by the Marine Corps Systems Command, Quantico, VA. Work is scheduled to be completed by Sep 2020, majority of which will be carried out in Linthicum Heights, MD.
The G/ATOR is a highly mobile, three-dimensional, multi-mission radar system that helps to detect and track multi-faceted low-rated, low-radar hostile targets. The importance of G/ATOR systems lies in its capability to perform multi-mission tasks at significantly lower operation and maintenance costs compared to other existing radar systems (Read more: Northrop Secures $376M Navy Deal for G/ATOR Radar ).
3. Textron also made it to the headlines last week after the company's management gave the green signal to a restructuring and realigning plan, in a bid to improve operating efficiency across the organization. The initiative includes discontinuation of the production of sensor-fuzed weapon or cluster bomb, which has been witnessing a decline in foreign military orders.
The restructuring plan will also lead to layoffs, consolidation of operations and asset impairments in the Weapons and Sensors operating unit. Furthermore, the Textron Systems segment will see job cuts and asset impairments as well.
Textron expects to incur pre-tax charges in the range of $110-$140 million in the third quarter of 2016, following these alterations in its business. Moreover, cash outlays for the restructuring initiative are projected to be between $65 million and $85 million in 2016 (Read more: Textron Gets Approval for Business Overhaul Drive ).
4 . Huntington Ingalls Industries, Inc. 's HII subsidiary, Ingalls Shipbuilding nabbed a contract for the procurement of long-lead materials for the ninth National Security Cutter ("NSC"). Valued at $88.2 million, the contract was awarded by the U.S. Coast Guard. These cutters can cover 12,000 miles with a maximum speed of 28 knots.
Huntington has already delivered five NSCs. It expects to deliver Munro, the sixth NSC, and launch Kimball, the seventh NSC, in the fourth quarter of 2016. The eighth NSC, Midgett, is expected to be laid later this year (Read more: Huntington Ingalls Unit Wins $88M Contract for NSC 9 ).
The major defense stocks have put up a mixed show over the past five trading sessions, with gains and losses balancing each other. General Dynamics Corporation GD was the biggest gainer, while The Boeing Company BA lost the maximum, with over a 1% 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
Last 6 months
What's Next in the Defense World?
It's clear that the Defense sector is grappling with a volatile phase, thanks to the lack of improvement in sight last week.
Nonetheless, a strong labor market, an improved outlook for economic activity and inflation in the U.S. hinting at least one rate hike this year will encourage investors to spend more. Besides, with the Q3 earnings season is scheduled for next month, we note that the aerospace/defense is one of the two sectors that put up the highest proportion of positive surprises last quarter (Read more: Our Earnings Trend Report ).
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