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Defense Stock Roundup: U.S.-North Korea Confrontation Boosts Sales

Fresh tensions broke out on the Korean border following North Korea’s launch of its first ballistic missile, capable of reaching the continental U.S., on 5th July. The U.S. defense stocks got a solid boost when, in retaliation, the U.S. and South Korean army jointly fired counter missiles on the very same day.

Further, U.S. Ambassador to U.N., Nikki Haley’s address surely gave a boost to investors’ optimism in the Aerospace-Defense space. During the speech, Haley had condemned North Korea’s action as ‘a clear and sharp military escalation’ against the U.S and indicated that the nation can and will use its militant force effectively to curb these threats if necessary.

As a result, major indices in this space saw an uptick over the trailing five trading sessions.  While the S&P 500 Aerospace & Defense (Industry) Index rose 2.3%, the Dow Jones U.S. Aerospace & Defense Index grew 2.2% during this period.

Moreover, a generous flow of funds from the Pentagon also boosted growth in this industry. Among last week’s highlights, defense majors, Lockheed Martin Corp. LMT, Huntington Ingalls Industries, Inc. HII, Harris Corp. HRS and Northrop Grumman Corp. NOC, clinched a handful of contracts from the U.S. Department of Defense. Meanwhile, The Boeing Co. BA announced its delivery numbers.

(Read Defense Stock Roundup for July 3, 2017 here)

Recap of the Week’s Most Important Stories

1. Pentagon’s largest defense contractor, Lockheed Martin’s Aeronautics business division secured a modification contract worth $5.6 billion to offer low-rate initial production (LRIP) of the 11th lot of F-35 Lightening II Joint Strike Fighter. Work is expected to be over by Dec 2020.

The deal has been awarded by the Naval Air Systems Command, Patuxent River, MD. Per the modification, Lockheed Martin will support the F-35 Joint Strike Fighter production by procuring 74 fiscal 2017 aircraft, comprising 48 F-35A aircraft for the Air Force, 18 F-35B aircraft for the Marine Corps, and eight F-35C aircraft for the Navy and Marine Corps.

The contract covers 61% of the purchases for the Air Force, 26% for the Navy and 13% for the Marine Corps. The LRIP 11 contract also comprises requirements for international partner nations and foreign military sales (FMS) customers (read more: Lockheed Martin Unit Wins $5.6B Deal to Offer F-35s).

Meanwhile, the company’s business unit, Sikorsky Aircraft, clinched a contract worth $3.8 billion for multi-year production of Black Hawk helicopters. Work is scheduled to be over by Jun 30, 2022.

This FMS contract to Saudi Arabia was awarded by the Army Contracting Command, Redstone Arsenal, AL. Per the terms, Sikorsky Aircraft will also provide services related to program system management, engineering, technical data and publications (read more: Lockheed Martin's Sikorsky Wins $3.8B Contract for Blackhawk).

The company’s Aeronautics unit won yet another contract last week. The deal, worth $409 million, was for Next Generation Thermal, Power, and Controls (NGT-PAC) program and was awarded by the Air Force Research Laboratory, Wright-Patterson Air Force Base, OH.

The contract involves numerous government agencies and industry aims at developing innovative technologies to carry out applied research for enhancing knowledge and understanding of future power, thermal and controls requirements. Work is scheduled to be completed by Jul 31, 2024 (read more: Lockheed Martin Unit Wins $409M Contract for NGT-PAC Program).

2. Military shipbuilder Huntington Ingalls’ Newport News business unit clinched a modification contract worth $219.4 million from the U.S. Navy to exercise options for performing actions under the USS Columbus (SSN 762) engineered overhaul. Work is scheduled to be over by Aug 2019.

Per the modification, Newport News will execute efforts for maintenance, repair, test and routine work, including growth work on USS Columbus. USS Columbus (SSN-762), the fourth ship of the Navy to be named after Columbus, is a Los Angeles-class attack submarine (read more: Huntington Ingalls Wins $219M Deal for USS Columbus).

The company secured another modification contract worth $218.1 million in relation to the LPD 29, the 13th variant of the San Antonio (LPD 17) class of amphibious warships. Work related to this deal is scheduled to be over by Feb 2018.

The deal was awarded by the Naval Sea Systems Command, Washington, D.C. Per the terms, Huntington will procure long lead time material and advance construction activities to support LPD 29 (read more: Huntington Ingalls Wins $218M Deal to Support LPD 29).

3. Technology innovator, Harris Corp, won a contract worth $461 million from the U.S. Army to support the capability to upgrade and modernize existing land mobile radio system infrastructure. Work for this deal is expected to be over by Jul 6, 2022.

Per the terms, the company will also replace the existing radio systems with the latest technology.

4. Defense giant Northrop Grumman’s Systems Corp unit won a contract worth a ceiling value of $93 million from the Marine Corps System Command, Quantico, VA. Work is expected to be over by Dec 30, 2017.

Per the terms, the company needs to provide software maintenance, technical and software development support toward the Command and Control Personal Computer (C2PC) and the Tactical Service Oriented Architecture (TSOA) system.

If all the ordering periods are exercised, it can witness an extension of up to four and a half years, ending Dec 2021 (read more: Northrop Grumman Wins $93M Navy Contract to Support C2PC).

5. Boeing’s second-quarter 2017 deliveries reflected in-line defense shipments figure on a year-over-year basis. To be specific, Boeing’s defense deliveries totaled to 45 in the second quarter, same as the year-ago figure. However, the reported figure was up from 42 in the preceding quarter.

Total deliveries consisted of 17 AH-64 Apache helicopters (both new and remanufactured) and 11 Chinook helicopters (new and renewed). In addition, the company delivered six F/A-18s, five P-8 models, four F-15s, and two Commercial and Civil Satellites (read more: Boeing's Q2 Commercial Deliveries Fall Y/Y, Defense in Line).

Performance

Over the last five trading sessions, majority of the defense stocks have put up an impressive show. Shares of Boeing witnessed the maximum rise of 3.18%, followed by Textron Inc. TXT.

Furthermore, over the last six months, the performance of the industry has been stellar, except that of Textron. Boeing once again saw maximum growth, with shares rising 28.22%, this time followed by General Dynamics Corp. GD.

The following table shows the price movement of the major defense players over the past five trading days and the last six months.

CompanyLast WeekLast 6 Months
LMT2.87%11.48%
BA3.18%28.22%
GD1.52%14.01%
RTN2.82%13.25%
NOC1.98%12.30%
COL2.41%18.26%
TXT3.01%-2.84%
LLL1.83%12.64%

What’s Next in this Space?

Lockheed Martin is scheduled to report its second-quarter 2017 numbers on Jul 18, before the market opens.

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Harris Corporation (HRS): Free Stock Analysis Report
 
Northrop Grumman Corporation (NOC): Free Stock Analysis Report
 
Boeing Company (The) (BA): Free Stock Analysis Report
 
General Dynamics Corporation (GD): Free Stock Analysis Report
 
Lockheed Martin Corporation (LMT): Free Stock Analysis Report
 
Huntington Ingalls Industries, Inc. (HII): Free Stock Analysis Report
 
Textron Inc. (TXT): Free Stock Analysis Report
 
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