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Defense Stock Roundup: Lockheed, Raytheon Score Billion Dollar Deals; Obama OK's Arms Sale Package to Taiwan

Defense stocks have been oscillating between the green and the red in recent times. Numerous tailwinds are at work in the defense space with Lockheed Martin LMT mostly stealing the limelight last week, clinching both big and small defense deals.

Lockheed Martin and Boeing BA once again expressed their disapproval last weekend on the Air Force's decision to have Northrop Grumman NOC build the long-range strike bomber (LRS-B). Boeing submitted a 133-page brief to the Government Accountability Office, or GAO, on Dec 17, reaffirming its argument that the selection process for the LRS-B was "fundamentally flawed."

Meanwhile, Boeing shares lost 4.11% on Dec 18 following Wells Fargo's downgrade from Outperform to Market Perform. The primary reasons behind the downward revision were lower expected guidance and risks going into 2016.

Overall, international sales continue to dominate the space with the White House giving the go-ahead for a major arms sales package to Taiwan.

(Read Defense Stock Roundup for Dec 15, 2015 here.)

Recap of the Week's Most Important Stories

1. Lockheed Martin 's Aeronautics Co. unit of Fort Worth, TX has been awarded a $1.17 billion contract from the U.S. Navy for the advance procurement of long lead time materials, parts, components and effort to maintain the planned production schedule for F-35 low rate initial production lot 11 aircraft.

The contract involves 80 F-35A aircraft to be built for the U.S. military and key allies, 7 F-35 B-model jets to be built for the U.S. Marine Corps and Britain, and 4 F-35 carrier-variant jets for the U.S. Navy.

The defense major also secured a $215.8 million foreign military sales ("FMS") contract for the sale of night vision systems for Apache attack helicopters to India. Per the contract, work on the systems will be executed in Orlando, FL and is expected to be completed by Dec 31, 2021 (read more: Lockheed Signs $215.8M Deal to Supply Night Vision Systems ).

Meanwhile, Pentagon's No. 1 contractor announced that it is filing a complaint in the court against the Defense department to fight the latter's decision of awarding a $6.75 billion contract for next-generation Humvees to Oshkosh Corporation (read more: Lockheed Martin Set to Sue Pentagon over $6.75B Contract ).

Moreover, the company filed an injunction that will likely force Oshkosh to halt work once again on building approximately 17,000 new trucks for the U.S. military.

2. Raytheon Co.RTN has clinched a major contract worth up to $2.35 billion to build 52 SM-3 Block IB missiles for the U.S. Missile Defense Agency using fiscal 2015 funding, plus three one-year options. The contract, originally proposed this April, covered 44 missiles to be produced for $541 million with eight new missiles added in the modification for a total of 52 missiles. The deal also has one-year options, starting from 2016 and ending in 2018, for an additional 52 missiles per year (read more: Raytheon Wins $2.35B MDA Contract for SM-3 Block IB ).

The SM-3 is presently in use on U.S. Navy ships to protect against ballistic missile threats.

3. President Obama's administration formally notified Congress last week of a $1.83 billion arms sales package to Taiwan, marking the first such major arms deal with the country in more than four years. The FMS includes two Perry-class Frigates, Javelin anti-tank missiles, TOW 2B anti-tank missiles and AAV-7 Amphibious Assault Vehicles. It also includes follow-on work for Taiwan's Syun-An C4ISR systems, Link 11/Link 16 for Taiwan's naval ships, F-16 MIDS/NTAMS/Fuzes and Phalanx Close-In Weapons Systems, and Stinger surface-to-air missiles.

Despite China's opposition, the approval came a year after Congress passed legislation approving the sale. Beijing considers Taiwan as part of its territory and, prior to the announcement, China demanded the deal to be scrapped to evade tensed relations across the Taiwan Strait between China and the U.S.

"In order to safeguard the nation's interests, the Chinese side has decided to take necessary measures, including the imposition of sanctions against companies participating in the arms sale to Taiwan," Vice Foreign Minister Zheng Zeguang said.

4. General Dynamics Corporation 's GD business unit, General Dynamics Information Technology, has secured a contract from the Defense Information Systems Agency to provide communications technical services for the U.S. Air Force's Central Command ("USAFCENT") in Asia. Per the contract, General Dynamics will provide support for communications systems acquisition, integration, installation, operations and maintenance. Work will be performed at the Shaw Air Force Base in Sumter, SC and locations throughout Southwest and Central Asia where the USAFCENT operates (read more: General Dynamics to Offer Support to U.S. Air Force in Asia ).

5. Most importantly, Congress passed and President Obama signed the $1.15 trillion omnibus spending measure that contained $572.7 billion for defense in a succession of votes in the House and Senate last week. The bill includes $514 billion for the Pentagon's base budget and $59 billion for the Overseas Contingency Operations account. The $573 billion for defense is $5 billion less than the President's request and $19 billion more than what was enacted for FY 2015.

Performance

In the last five trading days, the major defense companies showed mixed performances with companies like Lockheed Martin, General Dynamics and other defense majors barring Rockwell Collins COL recording meager share price appreciation. Others comprising Boeing, Raytheon, Textron TXT and L-3 Communications Holdings Inc. LLL ended in the red.

In the last six months, the picture seems to be volatile, peppered with gains and losses. Raytheon maintained its leading position with nearly 27% share price appreciation followed by Northrop Grumman. Boeing, General Dynamics, Rockwell Collins and Textron were in the red 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.

Company Last Week Last 6 months
LMT 0.29% 13.84%
BA -3.84% -2.08%
GD 0.04% -4.07%
RTN -0.65% 26.87%
NOC 0.62% 15.28%
COL 1.14% -4.95%
TXT -0.15% -10.62%
LLL -1.86% 0.99%

What's Next in the Defense World?

Nothing major is lined up in the coming week.

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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

RAYTHEON CO (RTN): Free Stock Analysis Report

GENL DYNAMICS (GD): Free Stock Analysis Report

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

LOCKHEED MARTIN (LMT): 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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