Investors stayed optimistic at the start of the third quarter 2014 earnings season. Over the last five trading sessions, most of the major defense companies have traded in the green.
Defense contractor Textron Inc. ( TXT ) hit the headlines in the past week with a convincing third-quarter earnings beat, as gains from Beechcraft and higher deliveries more than offset the negative impact from weak U.S. defense spending.
Foreign Military Sales (FMS) continue to be the defense companies' most important tool. General Dynamics Corp. ( GD ) is poised to nab a contract from the Pentagon for the Iraqi Army's M1A1 Abrams tank fleet. The U.S. Department of Defense's (DoD) prime contractor Lockheed Martin Corp. ( LMT ) won a sizable FMS contract for Patriot missiles.
(Read Defense Stock Roundup for Oct 7, 2014 for a recap.)
The U.S. military forces carried out multiple airdrops of ammunitions and supplies near Kobani, Syria, on Sunday to support Kurdish forces on the ground defending the city against Islamic State of Iraq and the Levant (ISIL) terrorists. Turkey also allowed Iraq's Kurdish Peshmerga forces to cross into Kobani to support the defense.
These airdrops are aimed at warding off ISIL's attempts to advance into Kobani, a Kurdish stronghold near Syria's border with Turkey. The U.S. has now changed the focus of its aerial bombing venture - its ire is now directed at the militants around Kobani instead of in Iraq or Syria.
As per data released by the Pentagon, U.S. forces have conducted more than 135 airstrikes against ISIL in Kobani.
The U.S. Central Command has picked a name for its continued engagement against the Islamic State as "Inherent Resolve". The Central Command explained that the name suggests the U.S administration and its partner nations' resolve and commitment to eliminate the terrorist forces in Iraq and Syria. This could only mean good news for the defense and aerospace industry which have already cashed in on the lingering crisis.
Recap of the Week's Most Important Stories
1. Textron Inc. reported solid earnings in the third quarter, beating the Street expectation, buoyed by its recent acquisition of plane maker Beechcraft Corp. The company also raised its earnings per share guidance for 2014 to a range of $2.05 to $2.15 (read more: Textron Beats Q3 Earnings Estimates, Lifts 2014 Outlook ).
2. The DoD awarded a $591.9 million contract modification to the jet engine maker Pratt & Whitney - a subsidiary of United Technologies Corp. ( UTX ) - to procure the 7th lot of propulsion systems for the military's F-35 Lightning II Joint Strike Fighter (JSF) aircraft This brings the total procurement and sustainment contract value to $943 million. Pratt & Whitney will work on 36 engines for the F-35 fighter planes being built by Lockheed Martin.
3. A Lockheed Martin unit secured a $595.5 million modification to an FMS contract from the U.S. Army to deliver Patriot missiles to Kuwait, Taiwan, Qatar and the United Arab Emirates (read more: Lockheed Martin Wins $595M FMS Modification Contract ).
Meanwhile, Lockheed Martin has made an important breakthrough in delivering realistic nuclear fusion technology within the next decade. The company will deliver a 100-megawatt fusion reactor in 10 years (read more: Lockheed Martin Progresses on Nuclear Fusion Power Plant ).
4. The U.S. State Department gave the green signal for a $600 million FMS contract comprising 46,000 120-millimeter armor-piercing tank rounds for the Iraqi Army's M1A1 Abrams tank fleet. General Dynamics Corp. will be the prime contractor on the project. The proposed deal is the latest in a series of weapon sales between U.S. and Iraq planned to reinforce Iraq's artillery position. The DoD has already announced about $10 billion in armaments sales to Iraq this year alone.
In the past five trading days, all the major defense companies traded in the green except L-3 Communications Holdings Inc. ( LLL ). Textron gained the most with 10.5%, followed by Rockwell Collins Inc. ( COL ).
In the past six months, the market reaction has been more or less mixed. Defense companies like Lockheed Martin, General Dynamics and Northrop Grumman Corp. ( NOC ) reported in the green, while some like Boeing Co. ( BA ), Raytheon Co. ( RTN ), Rockwell Collins, Textron and L-3 Communications Holdings were in negative territory.
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?
Boeing, Northrop Grumman and General Dynamics are scheduled to report their third quarter results on Oct 22, 2014 before the market opens. Raytheon is set to report its third quarter results on Oct 23 before the opening bell.
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