Zacks Industry Outlook Highlights: Lockheed Martin, Northrop Grumman, General Dynamics, Boeing and Textron

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Aug 15, 2014, 09:30 ET

CHICAGO, Aug. 15, 2014 Today, Zacks Equity Research discusses the Aerospace and Defense, including Lockheed Martin Corp. (NYSE:LMT-Free Report), Northrop Grumman Corp. (NYSE:NOC-Free Report), General Dynamics (NYSE:GD-Free Report), Boeing Co. (NYSE:BA-Free Report) and Textron Inc. (NYSE:TXT-Free Report).

Industry: Aerospace and Defense

Link: http://www.zacks.com/commentary/33936/

Although sequestration casts a shadow of uncertainty on long-term funding for periods beyond fiscal 2015, if we are to pick the top defense stock it would be Pentagon's prime contractor and the world's largest defense company Lockheed Martin Corp. (NYSE:LMT-Free Report). The company reported a forecast-beating 4.5% rise in second-quarter 2014 earnings per share, backed by strong operational performance. The company raised its 2014 earnings guidance, reflecting lower pension costs and an improved outlook for its space unit.

Given the vital role played by satellites in the military space, Lockheed Martin is looking to bolster its satellite product coverage by increasingly investing in R&D and acquisitions.

Although Lockheed has run up against F-35 glitches lately, its F-35 program will definitely trigger significant top-line generation for the company. The Pentagon in its budget for fiscal 2015 (beginning Oct 1) requested $8.3 billion for 34 of the aircraft, including 26 F-35As, 6 F-35Bs and 2 F-35Cs.

Another defense giant, Northrop Grumman Corp. (NYSE:NOC-Free Report), has delivered a year-to-date return of about 7.34%, outperforming the S&P return of 4.62%. With a market cap of $25.58 billion, the defense major has a one-year return of 28.83%, higher than the S&P 500 return of 14.33%.

This Zacks Rank #2 (Buy) company reported higher profits in the second quarter despite missing analyst expectations. The company also raised its earnings guidance for the year, with international sales expected to reach 13% of total sales, up from 10% in 2013. The growth will likely come from unmanned aerial vehicles and cyber security work. It has delivered a positive earnings surprise of about 3.03% on an average over the last 4 quarters.

In a nutshell, a steady flow of contracts, which also include substantial international orders, a funded backlog of $35.55 billion as of Jun 30, 2014 the introduction of new products, and the commitment to return wealth to its shareholders make this stock attractive.

Since the start of 2014, there have been a number of share price gainers with General Dynamics (NYSE:GD-Free Report) witnessing the highest increase of around 23.72% buoyed by consistent contract wins and a stable second quarter 2014 performance. The Pentagon's #3 contractor posted a 5.46% positive surprise over the last four quarters on an average. Yet, its revenues fell 4.6% in the second quarter, missing the Street expectation. Nonetheless, this Zacks Rank #2 (Buy) company recently increased its overall earnings outlook for the year to $7.40 to $7.45 per share from its earlier forecast of $7.05 to $7.10 per share. The company's cost-cutting initiatives spurred profitability even as defense spending by the U.S. government remained low.

Another aerospace giant, The Boeing Co. (NYSE:BA-Free Report), carrying a Zacks Rank #2 (Buy), delivered a 17.30% positive surprise over the last four quarters on an average driven by solid operating performance and fueled by higher aircraft deliveries.

The company is also on the lookout for more international contracts to keep its top line rolling. Boeing is expanding its presence in cyber security, intelligence and surveillance and unmanned systems, where growth rates are higher than the overall defense budget.

Recently, Boeing delivered upbeat second quarter 2014 results backed by robust deliveries and soaring profits (up 45% year over year). Moreover, Boeing raised its full-year 2014 earnings outlook.

Another Zacks Ranked #2 (Buy) diversified U.S. conglomerate, Textron Inc. (NYSE:TXT-Free Report), reported better-than-expected second quarter 2014 earnings buoyed by higher contribution from most of its business segments. The Beechcraft acquisition also acted as a catalyst to the company's quarterly performance. Textron reaffirmed its 2014 earnings per share from continuing operations guidance, taking into consideration the Beechcraft acquisition.

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