Zacks Industry Outlook Highlights: Lockheed Martin, Huntington Ingalls Industries, L-3 Communications Holdings, Textron and Rockwell Collins

CHICAGO, Dec. 20, 2013 /PRNewswire/ -- Today, Zacks Equity Research discusses the U.S. Aerospace and Defense, including Lockheed Martin Corp. (NYSE:LMT-Free Report), Huntington Ingalls Industries Inc. (NYSE:HII-Free Report), L-3 Communications Holdings Inc. (NYSE:LLL-Free Report), Textron Inc. (NYSE:TXT-Free Report) and Rockwell Collins Inc. (NYSE:COL-Free Report).

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Industry: Aerospace and Defense

Link: http://www.zacks.com/commentary/30492/aerospace--defense-stock-outlook---dec-2013

The aerospace and defense industry found its largest base in the U.S. with a fittingly impressive military budget. The U.S.'s global leadership position requires it to maintain the capacity to respond to the ever-changing national security environment.

Sequestration and spending cuts were expected to adversely affect the performances of the defense behemoths that explicitly provide products and services to the U.S. Department of Defense. In reality, the defense players are doing well despite the fear of Damocles' sword hanging over defense budgets and big-ticket programs.

Budget Issues - the Sequester

In Apr 2013, the Obama administration proposed a defense budget of $526.6 billion for FY14, down $0.9 billion from the FY13 annualized continuing resolution level of $527.5 billion.

Again in May, an amendment to the FY2014 President's budget was issued that included $80.7 billion (excluding prior-year cancellations) for Overseas Contingency Operations (OCO), which is essentially government-speak for foreign wars and war on terror operations.

On Dec 10, 2013, the House and Senate negotiators have reached a two-year budget agreement, mitigating about half the sequester cuts expected to gouge the defense budget in fiscal year 2014. Upon successful approval from both the House and Senate, any near-term government shutdown will be averted.

The budget sequester that went into effect at the start of Mar 2013 and that has a direct bearing on the U.S. government's defense spending is a function of the country's fiscal and economic challenges. These cuts will not spare any of the defense majors from Lockheed Martin Corp. (NYSE:LMT-Free Report) to Huntington Ingalls Industries Inc. (NYSE:HII-Free Report).

Offsetting the Sequestration Effect

Sequestration will cut some $1 trillion from the defense budget over the next decade, according to The Washington Free Beacon. Yet, the aerospace and defense industry is holding up well this year thanks to technological innovations, big contracts, acquisitions and growing commercial demand.

Since the domestic aerospace and defense sector is facing budget cuts and a constrained spending environment, the industry is looking for growth from international orders. Additionally, a number of new emerging markets as well as developed nations such as India, Japan, the United Arab Emirates, Saudi Arabia and Brazil are boosting defense spending and generating business for the U.S. aerospace and defense companies.

Moreover, these defense behemoths have diversified their businesses to counter the effect of the sequester. Also, the complex military programs being awarded to these companies much before the across-the-board spending cuts came into force have somewhat diluted the sequester impact.

Zacks Industry Rank

The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks. The way to look at the complete list of 258+ industries is that the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.' Zacks Industry Rank for the Aerospace industry is at #170 out of 258 industries, which puts it in the Neutral zone.

Earnings Review and Outlook

The third-quarter earnings season has been a testament to the bullish trend in the defense sphere, defying sequestration and budget cut woes. The earnings results of all the defense companies in our universe, except two surpassed the Zacks Consensus Estimate.

The highest positive surprise of 37 cents came from Huntington Ingalls while the lowest surprise of 2 cents was clocked by L-3 Communications Holdings Inc. (NYSE:LLL-Free Report). On the contrary, Textron Inc. (NYSE:TXT-Free Report) and Rockwell Collins Inc. (NYSE:COL-Free Report) missed the Zacks Consensus Estimate by 25.53% and 2.29%, respectively.

As of Nov 22, 2013, the aerospace sector's top and bottom line beat ratio was 62.5% and 75%, respectively as compared to 42.1% and 65.4%, respectively, for the S&P 500.

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