CHICAGO, April 28, 2011 /PRNewswire/ -- Today, Zacks Equity Research discusses the Aerospace Industry, including: Lockheed Martin Corporation (NYSE: LMT), The Boeing Company (NYSE: BA), Northrop Grumman Corp. (NYSE: NOC) and URS Corporation (NYSE: URS).
Lockheed Martin Corporation (NYSE: LMT) is the biggest recipient of U.S. defense contracts, followed by The Boeing Company (NYSE: BA) and Northrop Grumman Corp. (NYSE: NOC). With the wars in Iraq and Afghanistan expected to wind down in the coming years, core defense spending is also expected to trend downward. The big operators, in order to counter defense budget cuts, will most likely target mergers and acquisitions to bolster their operating prospects.
At the macro level, a gradual shift in defense spending patterns can be discerned. In response to the 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.
This saw the U.S. defense companies going on an acquisition spree, in 2010, with 255 completed transactions in the year worth $24 billion. The defense pros are expected to sustain the momentum in 2011, eclipsing the previous year's level. The U.S. Defense department also endorses mergers among U.S. defense companies provided they don't involve the top five or six suppliers acquiring each other.
Boeing has been particularly active on this front, having acquired Argon ST, a premier developer of intelligence equipment, and Narus, a provider of real-time network traffic and analytics software. Boeing further strengthened its position in the logistic command and control business through the acquisition of CDM Technologies, a software engineering company that specializes in real-time transportation and logistics planning systems for the U.S. military.
These defense operators are also entering into strategic alliances and partnerships with competitors to improve their prospects of clinching major contracts. Lockheed Martin has teamed up with URS Corporation (NYSE: URS) and InDyne to pursue the Launch & Test Range System Integrated Support Contract (LISC), which the U.S. Air Force expects to award in 2012.
Boeing and Northrop Grumman have also joined hands, submitting a joint proposal for the U.S. Missile Defense Agency (MDA) Objective Simulation Framework (OSF) program. The contract is expected to be awarded in July 2011, with an estimated value of $595 million spread over a five-year period.
These operators are also making planned divestitures to remain profitable and better meet customer demand. Northrop has successfully spun off its Shipbuilding business in March 2011. This has resulted in its revenue base being heavily skewed toward short business cycle programs that have a fast turnaround in capital resulting in higher earnings.
Lockheed Martin has divested its Enterprise Integration Group business due to the U.S. government's increased concerns about perceived organizational conflicts of interest within the defense contracting community, while the company also divested its Pacific Architects and Engineers Inc. business so as to cater to a different mix of services sought by customers.
The Pentagon continues to invest in military space and is expected to spend $4.1 billion in military space research and development work and another $4.2 billion in space procurement in 2011. Over the next decade, the U.S. will account for 77% of the global military satellite sales market, with Asian countries grabbing 12.5% of the market share and the European countries 9.3% of the pie.
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