For Immediate Release
Chicago, IL – April 24, 2015 – Today, Zacks Equity Research discusses the Aerospace & Defense (Part 2), including Lockheed Martin Corp. (LMT), Northrop Grumman (NOC), Raytheon Company (RTN), Textron Inc. (TXT) and Boeing (BA).
Industry: Aerospace & Defense (Part 2)
Link: https://www.zacks.com/commentary/43764/defense-majors-thrive-as-countries-shop-for-high-tech-weapons
Regional conflicts and forces of autocracy continue to be a threat, leading to armed confrontations time and again. The invasion and takeover of Crimea and continuing troubles in Ukraine, the ISIS and Syrian conflict, continued saber-rattling by the North Korean leadership and high tensions over the disputed ownership of islands in the East and South China Sea are some of the ongoing global flashpoints.
Increasing threats and the need to safeguard the interest of nations and people have pushed up demand for U.S. weapons exports to an all-time high, benefiting the U.S. defense manufacturers.
Given the budget challenges at home, the defense majors are working on (i) how to grow profitably from diminishing budgets and (ii) slash costs for maintaining a satisfactory financial condition. In this context, General Dynamics Corp.’s (GD) fourth quarter earnings were especially noteworthy, rising 18.1% from the prior year while margins expanded 130 basis points to 12.8%. The company’s backlog increased an impressive 58% during 2014.
Many of the defense majors are doing a decent job, propelled by the following strategies.
Next-Generation Technology: At the macro level, there has been a gradual shift in defense spending patterns. In response to asymmetric terrorist threats, the emphasis appears to have shifted to high-tech intelligence equipment, replacing demand for conventional big guns and heavy armor.
The major industry players have, in response, resorted to bolt-on acquisitions to plug gaps in their product offerings. A focus on R&D is also helping these companies to develop next-generation technologies essential in a climate of fewer programs and reduced budgets.
Defense companies will increasingly be required to come up with more sophisticated intelligence, surveillance and reconnaissance (“ISR”) technologies. The contractors specializing in space systems will continue to gain from the Pentagon’s increasing focus on its space division to counter emerging security threats.
Given the vital role played by satellites in the military space, Pentagon’s prime contractor and the world’s largest defense company Lockheed Martin Corp. (LMT) is looking to bolster its satellite product coverage by increasingly investing in R&D and acquisitions.
Northrop Grumman (NOC) is bringing more focus to its airborne and space ISR business by realigning its divisions. In particular, the emphasis is on ISR systems, advanced electronics and software development technologies. It is the proud owner of the popular Global Hawk, an unmanned system with the ability to transform itself into an operational weapons system when required. Northrop also boasts products like the E-2D Advanced Hawkeye, which provides 360-degree surveillance at all times.
Export of U.S. Drones: The Obama administration recently unveiled new plans for the international export of U.S. military drones, including armed drones, to U.S. allies. As per the new policy, the export of U.S. drones will be approved on a case-by-case basis following export requests made by allied countries. And the export must essentially be made through government programs, as is the case with all weapon exports.
This shift in U.S. policy has an ulterior aim of curbing the import of drones by allied nations from other countries such as Israel and China. Both nations also manufacture exportable unmanned aerial vehicles (“UAVs”), also referred to as unmanned military aircraft. The obvious beneficiaries of the new export policy are the U.S. defense players. The export policy would open up a window of opportunity for those developing unmanned systems or building sensors and missiles for use on those systems.
Notable among these companies are Raytheon Company (RTN) and Textron Inc. (TXT).
Foreign Military Sales (FMS): The big defense operators are also expanding their operations through acquisitions and foreign orders. FMS remains the key tool for boosting their top line.
The ongoing Iraqi civil war, tensions in Eastern Europe and demand for defense products in the Middle East and other Asian nations keep alive the hopes for this sector. A number of emerging markets as well as nations such as India, Japan, the United Arab Emirates, Saudi Arabia and Brazil are increasing defense spending and generating business for the U.S. aerospace and defense companies.
In fiscal 2014, U.S. military sales to its allies stood at $34.2 billion, according to the Defense Security Cooperation Agency. This marked a slight uptick from approximately $30 billion in sales in fiscal 2013.
Foreign military contracts are a vital growth driver at Raytheon. The company has been witnessing a steady rise in international sales over the past few years. In 2014, international sales accounted for 29% of total net sales. Rising demand from the Gulf countries as well as the Asia-Pacific region will likely be the company’s key revenue driver.
Boeing (BA) is on the lookout for more international contracts to keep its top line rolling. The company is expanding its presence in cyber security, intelligence and surveillance and unmanned systems, where growth rates are higher than the overall defense budget.
Restructuring/Diversification/Acquisition: To maintain margins in a declining revenue environment, costs need to shrink. The operators are busy restructuring their businesses and engaging in prudent acquisitions. Another ploy utilized by these companies to avert budget austerities is to steadily diversify into the commercial aviation market. Commercial aviation is a comparatively newer industry, when compared to defense, with the sky as its literal limit. Increasing mobility in the emerging markets continue to drive this space.
In Feb 2015, Boeing declared the formation of a new organization -- BDS Development -- as part of the restructuring of its defense and space business. The move is expected to enhance product efficiency and lower costs for Boeing’s defense customers in addition to maintaining delivery schedules.
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LOCKHEED MARTIN (LMT): Free Stock Analysis Report
NORTHROP GRUMMN (NOC): Free Stock Analysis Report
RAYTHEON CO (RTN): Free Stock Analysis Report
TEXTRON INC (TXT): Free Stock Analysis Report
BOEING CO (BA): Free Stock Analysis Report
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