On a mixed day for stocks, several big Aerospace and Defense companies are in the red after posting their latest quarter results. The big three making headlines are The Boeing Company (BA), Lockheed Martin (LMT) and Northrop Grumman (NOC). My Growth Investor readers know that I currently recommend all three of these companies. Is today’s dip a buying opportunity…or a sell signal? Let’s find out by looking closely at the numbers, starting with Boeing.
Last quarter, Boeing had an order backlog of $488 billion, including orders for nearly 5,900 airplanes. Compared with the year ago quarter, sales climbed 5% to $24.3 billion. This beat the $24.0 billion consensus estimate by 1.3%.
Net earnings jumped 26% year-on-year to $2.2 billion, or $3.73 per share. Excluding special items, adjusted earnings came in at $3.33 per share. Analysts predicted adjusted earnings of $3.26 per share, so Boeing posted a 2.1% earnings surprise.
Despite the sales and earnings beats, BA shares dipped following the announcement. There was one line item that investors didn’t like–Boeing’s full-year forecast for its defense business. Due to rising costs in the KC-46 aerial refueling tanker program, the company reduced its forecasted operating margins to a range of 10% to 10.5%. Previously, Boeing was calling for 11% operating margin in its defense business for this year.
The Bottom Line
Investors are overreacting to one line item in an otherwise strong report. Boeing’s forecast for 2018 company-wide sales and earnings is still very solid. This year, the company expects core earnings to range between $14.30 and $14.50 per share, or 38.8% to 40.8% annual earnings growth. Boeing is targeting revenue between $97 billion and $99 billion, or 3.9% to 6.0% annual sales growth. By comparison, the Street view is for $14.56 EPS on $98 billion in revenue.
With these strong forecasts, BA is still an A-rated Strong Buy.
Last quarter, Lockheed Martin achieved an order backlog of $105 billion. Compared with Q2 2017, net sales climbed 6.3% to $13.4 billion. This beat the $12.7 billion consensus sales estimate by 5.5%. Meanwhile, net earnings rose 25.7% year-on-year to $1.2 billion, or $4.05 per share. Analysts were looking for $3.92 earnings per share, so Lockheed Martin posted a 3.3% earnings surprise.
The company also lifted its forecast for FY 2018. Lockheed Martin now expects earnings to range between $16.75 and $17.05 per share and sales to range between $51.6 billion to $53.1 billion. Compared with FY 2017, this represents between 143.1% and 147.5% earnings growth and between 1.0% and 3.9% sales growth. This revised guidance is also about the Street view of $16.17 EPS on $51.32 billion in revenue.
There really weren’t any negative details from Lockheed Martin’s report, which was released yesterday. It appears that LMT is getting caught up in the general selloff sparked by Boeing and Northrop Grumman.
The Bottom Line
While Lockheed Martin’s fundamentals aren’t quite as strong as Boeings, it remains a solid B-rated Buy.
Last quarter, Northrop Grumman had an order backlog of $52.2 billion. Compared with Q2 2017, sales rose 10% to $7.1 billion, in line with analysts’ expectations. Over the same period, net earnings increased 24.1% to $689 million, or $3.93 per share. Analysts expected $3.83 per share, so Northrop Grumman posted a 2.6% earnings surprise.
Northrop Grumman also raised its earnings outlook for FY 2018. The company now expects EPS in a range of $16.60 to $16.85, or 25% to 26.9% annual earnings growth. Northrop Grumman maintained its existing sales guidance of $30 billion, or about 16.3% annual sales growth. By comparison, the Street view is for $16.63 EPS on $30 billion in sales.
This was a strong earnings report, but it looks like some investors were just waiting to take profits on NOC.
The Bottom Line
I don’t recommend following the crowd. This company still has robust fundamentals, so I expect that the stock will bounce back in the coming days. Like LMT, NOC is a solid B-rated Buy.
So, for any of my Growth Investor readers out there, please note that I’m still recommending these three stocks as buys on the dip. If any of these recommendations change, I’ll make an update on the Growth Investor Buy List.