Is this the beginning of the end for the defense and aerospace industry?
For the first time in 15 years, global arms spending is going to fall—all due to the $87 billion in U.S. defense cuts planned for this year.
And this morning, the Commerce Department announced that durable goods orders slumped 5.7%—of that, demand for civilian aircraft plunged a shocking 48%.
Between all that and sequestration, it seems like an open and shut case against defense and aerospace companies, right?
Well, not exactly. As much as the media likes to pick on these companies, I ‘m going to let their earnings announcements speak for themselves. Speaking of which, four of the top names in the defense have just released their first-quarter earnings results. So while the ink dries on these stories, let’s revisit these defense giants and separate fact from sensationalism.
Boeing Co. (BA) announced that a tax credit helped offset lost revenue from lower 787 deliveries in the first quarter. So compared with Q1 2012, net earnings jumped 20% to $1.11 billion. Core earnings weighed in at $1.73 per share, which blew analyst expectations out of the water—they had forecast earnings of just $1.48 per share, so Boeing posted a 17% earnings surprise. At the same time, total revenues dipped 32% to $18.89 billion, but that was still higher than the $18.84 billion consensus estimate. Looking ahead for 2013, management expects sales in the range of $82 billion to $85 billion—this matches the Street view, which calls for $83.84 billion in sales. BA is a B-rated Buy.
General Dynamics Corp. (GD) saw net earnings climb 1% year-over-year to $571 million, or $1.62 per share. This trumped the $1.50 per share consensus estimate by 8%. Over the same period, quarterly revenues declined 2% to $7.4 billion, and this missed the $7.55 billion consensus estimate by 2%. As to be expected, GD is a D-rated sell.
Lockheed Martin Corp. (LMT) also released mixed earnings results for the first quarter. According to the company, sluggish aeronautics sales weighed on the company’s top line. So compared with the same quarter last year, net sales dropped 2% to $11.07 billion. Even so, this managed to top the $10.31 billion Street view by 7%. Over the same period, net earnings advanced 14% to $761 million. Adjusted earnings came out to $2.33 per share, which beat the $2.04 consensus estimate by 14%. To account for budget cuts related to sequestration, Lockheed Martin now sees net sales at the low end of its previous guidance, which called for between $44.5 billion and $46 billion. LMT is a C-rated hold.
Northrop Grumman Corp. (NOC) reported that first-quarter profit declined 3% year-over-year to $489 million, or $2.03 per share. Adjusted earnings weighed in at $1.94 per share, and because analysts had forecast earnings of $1.74 per share, Northrop Grumman posted an 11% earnings surprise. Meanwhile, total sales also retreated 2% to $6.1 billion; this also topped the $5.96 billion consensus estimate by 2%. Looking ahead to 2013, Northrop Grumman expects earnings in the range of $6.85 to $7.15 per share and sales around $24 billion. This is in line with the Street view, which calls for earnings of $7.02 per share on $24 billion in sales. NOC is a B-rated Buy.
The Bottom Line: Even in the face of the defense cuts, some companies are still making out. You may be surprised to learn that the average aerospace and defense company is headed towards 43% earnings growth this year. Of the companies I covered above…
- Boeing is due to post 2.6% sales growth and 24.7% earnings growth.
- General Dynamics is headed towards a 0.2% drop in sales and 2.9% earnings growth.
- Lockheed Martin is expected to see sales drop 4.4% and earnings rise 4.4%.
- Northrop Grumman is headed towards a 4.8% drop in sales and a 10.1% drop in earnings.
And all the while, analysts have been steadily revising their 2013 estimates up for three of the companies—2013 is expected to be a challenging year for General Dynamics . So while it still pays to be cautious about selecting defense plays, there certainly are buying opportunities to be had. Now, if you’re willing to venture into small- and mid-cap territory, I consider these three companies to be the top buys in this sector right now.