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Defense Stock Roundup: Navy Funds Two of Three FY '16 Arleigh Burke-Class Destroyers & More

The Pentagon showered funds last week though they have yet to be reflected in terms of impressive gains in aerospace and defense market indices.

Among the important highlights, the U.S. Navy has funded two of three FY2016 Arleigh Burke-Class Destroyers; the Navy also awarded Lockheed Martin LMT and Australia-based firm Austal contracts for LCS-25 and 26. Raytheon RTN signed a contract to deliver 245 Stinger air-to-air missiles to India.

(Read Defense Stock Roundup for Mar 29, 2016 here.)

Recap of the Week’s Most Important Stories

1.    The Boeing Co. BA has secured a $325.8 million U.S. Air Force contract for 15,000 more Joint Direct Attack Munitions (JDAM) tail kits to give precision-guidance capabilities to gravity weapons, the U.S. Department of Defense (DoD) announced last week. Work on the kits will be performed at St. Louis, MI, and is expected to be completed by Mar 29, 2018.

The latest contract is part of a U.S. Air Force endeavor to boost production of smart bombs that are used against the Islamic State group. The U.S. Air Force expects to reach the target by late 2017.

It is worth noting that the Pentagon’s FY17 proposed budget projected a $1.8 billion fund to procure 45,000 smart bombs and other guided munitions to replenish supplies in the continuing campaign against ISIS.

Apart from the JDAM contract, this defense major received a $275 million contract from the Pentagon for research and engineer technology aimed at enhancing ground-based space capabilities. The DoD said the contract is to increase scientific knowledge of these capabilities and apply the results to "achieve Air Force and national goals."

Boeing also received a $235.3 million modification contract for the procurement of long-lead items for the manufacture and delivery of 11 Lot 8 full-rate production IV P-8A aircraft for the U.S. Navy. The contract will run through Jan 2017.

2.    Lockheed Martin Corp. sealed its first order, worth $480 million, for a dozen cargo-carrying hybrid airships that its top secret Skunk Works division has been developing for over a decade. The production of airships was hit after Hindenburg's ruin in 1937. However, they are likely to make a come back with Lockheed Martin’s Hybrid Airships. UK-based Straightline Aviation (SLA) has signed a letter of intent on Wednesday to buy 12 Hybrid Airships, the first delivery of which is expected in 2018. The deliveries will continue for roughly two years (read more: Lockheed Martin Secures $480M Hybrid Airship Deal).

Again, Lockheed Martin has secured a contract from the DoD to build another Littoral Combat Ship (LCS) at Fincantieri Marinette Marine. Although the value of this contract was not disclosed, the DoD stated that it would not exceed the $564 million limit set by Congress.

Meanwhile, Australia-based global shipbuilding company Austal won a similar contract to build one LCS for the U.S. Navy. A variant of the LCS ship is being built at Austal USA’s yard in Alabama.

It is important to note here that the Navy will most likely go ahead and purchase 52 LCS ships in spite of government officials telling them to cut the number. Recently, Defense Secretary Carter made a proposal to the Navy to cut purchases to 40. Navy officials have however held fast to their 52-ship target (read more: Lockheed Martin Wins Littoral Combat Ship Contract).

3.    A Huntington Ingalls Industries HII unit, Ingalls Shipbuilding, has won a $618 million contract to fund the construction of a new guided-missile destroyer for the U.S. Navy.

The Arleigh Burke-class guided missile destroyer, DDG 123, is the fourth of five destroyers Ingalls will be constructing as part of a multi-year contract awarded in Jun 2013.

We remind investors that the Ingalls segment manufactures amphibious assault and expeditionary ships for the U.S. Navy. The division is the only builder of National Security Cutters for the U.S. Coast Guard and one of only two companies, the other being General Dynamics Corp. (GD), that build the Navy's current fleet of DDG-51 Arleigh Burke-class destroyers (read more: Huntington Ingalls Wins a Big U.S. Navy Destroyer Contract).

4.    General Dynamics Corporation GD also scored a contract from the U.S. Navy to design and build an Arleigh Burke-class destroyer for fiscal 2016. Its business unit, Bath Iron Works (“BIW”), has won a contract to design and build an Arleigh Burke-class destroyer, Harvey C. Barnum Jr. The contract is worth $644.3 million.

The aforesaid deal is part of a multi-year contract for DDG 51 Arleigh Burke-class destroyers jointly awarded to General Dynamics and Huntington Ingalls Industries in Jun 2013 (read more: General Dynamics Unit Wins $644M U.S. Navy Contract).

Meanwhile, the U.S. Navy released a new submarine construction plan that makes General Dynamic Electric Boat the prime contractor on the costly Ohio-class replacement sub program.

Under the Navy’s new Submarine Unified Build Strategy (SUBS) program, it plans concurrent production of the ballistic-missile-firing Ohio-class replacement submarines and Virginia-class attack submarines. Construction of the first Ohio-class replacement sub is scheduled to begin in 2021, and deliveries of Virginia-class subs will continue through at least 2023.

In Dec 2015, the Congressional Budget Office had said the total price tag of the Ohio-class replacement boats will be between $102 billion and $107 billion. Congress has not yet allocated funds for the program.

5.    Raytheon Company has signed an agreement with the Indian Ministry of Defense through the U.S. Department of Defense’s foreign military sales (“FMS”) program to deliver 245 Stinger air-to-air missiles as well as launchers and related engineering support services.

The latest deal forms a part of a wider FMS agreement between India and the U.S., worth $3.1 billion, which includes combat helicopters, weapons, radars and electronic warfare suites.

The Stinger has been used in four military conflicts — Falklands War, Angolan Civil War, Yugoslav Wars and during the attack of Soviet Union on Afghanistan (read more: Raytheon Signs FMS Deal with India for Stinger Missiles).

Performance

Defense stocks showed a mixed performance in the past five trading sessions with Boeing, General Dynamics, Rockwell Collins COL and L-3 Communications Holdings Inc. LLL off their mark. However, Raytheon gained over 2% followed by Northrop Grumman NOC.

The past six-month picture is also peppered with gains and losses. Northrop Grumman gained the most while Textron was the biggest loser, with over 7% depreciation.

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

1.19%

8.84%

BA

-1.21%

-4.19%

GD

-0.68%

-6.03%

RTN

2.45%

16.48%

NOC

1.78%

21.13%

COL

-1.22%

9.41%

TXT

0.22%

-7.89%

LLL

-0.74%

11.92%



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