Defense Stock Roundup: Warren's Proposal Rings Alarm Bells, NOC & CW Lift Dividend

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U.S. Senator Elizabeth Warren’s recent proposal, aimed at curbing corporate influence on the Pentagon, dealt a blow to the U.S. defense contractors. On May 16, she offered the Department of Defense Ethics and Transparency Act. If enacted, the legislation will limit the influence of defense contractors on the military, curb foreign influence on retired senior military officers. Also, it will increase transparency regarding the Defense Department’s interactions with contractors like Boeing and Lockheed Martin.

As expected, this proposal caused a mild upheaval in the U.S. Aerospace and Defense industry recently. Notably, the industry’s major indices like the S&P 500 Aerospace & Defense (Industry) slipped 0.3%, while the Dow Jones U.S. Aerospace & Defense index decreased 0.6% in the trailing five trading sessions.

Among the past week’s highlights, a handful of Aerospace-Defense players like Embraer S.A. ERJ, TransDigm Group, Inc. TDG and Triumph Group, Inc. TGI reported their quarterly numbers. Northrop Grumman Corp. NOC and Curtiss-Wright Corporation CW also hit the headlines owing to dividend hike announcements. Additionally, Northrop won a significant contract from the Pentagon.

Recap of Past Week’s Important Stories

1.   Embraer incurred first-quarter 2019 adjusted loss of 34 cents per American Depository share (ADS), wider than the Zacks Consensus Estimate of a loss of 21 cents. Also, its top line decreased 14.3% year over year primarily on account of lower deliveries at the Commercial Aviation segment along with lower revenues from used jet sales in the Executive Jets segment.

The company’s backlog at the end of the quarter was $16 billion, down from $19.5 billion in the year-ago quarter.

Its adjusted free cash outflow totaled $665.3 million as of Mar 31, 2019, compared with free cash outflow of $435.2 million at the end of the year-ago period (read more: Embraer Q1 Earnings Miss, Commercial Deliveries Drop Y/Y).

2. Triumph Group’s adjusted earnings from continuing operations in fourth-quarter fiscal 2019 (ended Mar 31, 2019) came in at $1.15 per share, which surpassed the Zacks Consensus Estimate of 68 cents by 69.1%. However, the top line declined 3.1% on a year-over-year basis.

The company’s backlog totaled $3.8 billion, up 4% organically from the figure registered in the prior-year period.

Its cash used in operating activities in fiscal 2019 was $174.3 million compared with $288.9 million last year. Furthermore, Triumph Group issued its guidance for fiscal 2020 (read more: Triumph Group Q4 Earnings Top Estimates, Sales Down Y/Y).

3. TransDigm reported second-quarter fiscal 2019 adjusted earnings of $4.21 per share, which surpassed the Zacks Consensus Estimate of $3.86 by 9%. Its net sales amounted to $1195.9 million, mirroring 28.2% growth year over year.

The company ended the second quarter with cash and cash equivalents of $2,441.3 million, up from $2,073 million as of Sep 30, 2018.

Cash from operating activities amounted to $453 million as of Mar 30, 2019, compared with $453.7 million as of Mar 31, 2018. Additionally, TransDigm raised its fiscal 2019 guidance (read more: TransDigm Q2 Earnings Beat Estimates, FY19 View Up).

4. Northrop announced that its board of directors has approved a 10% hike in its quarterly common stock dividend. The new quarterly dividend of $1.32 per share is up by 12 cents from the earlier quarterly dividend.

Positive synergies from the integration of Orbital ATK, which Northrop Grumman acquired last year, have been accretive to Northrop Grumman’s earnings and free cash flow in 2018. This must have encouraged the company to reward its shareholders with the latest dividend hike (read more: Northrop Grumman Approves 10% Increase in Dividend).

Meanwhile, the company’s subsidiary, Northrop Grumman Systems Corp., secured a $163.9 million contract for providing fleet support to the Hunter unmanned aircraft system (UAS). The deal is expected to be completed by May 9, 2020.

Per the terms of the deal, the company will conduct operations, maintenance, engineering, re-engineering and remanufacturing of the Hunter unmanned aircraft system (read more: Northrop Grumman Wins $164M Deal to Aid Hunter UAS Program).

5. Curtiss-Wright announced a 13% hike in quarterly cash dividend to 17 cents per share, resulting in an annualized dividend of 68 cents. Further, its board of directors authorized a new share repurchase program worth $200 million.

During 2019, the company expects to repurchase at least $50 million in shares via its existing 10b5-1 program, which commenced in January 2019, and exhaust the remainder of prior-share repurchase authorization, announced last December (read more: Curtiss-Wright Hikes Dividend, Announces Share Buyback Plan).

Performance

In the past five trading sessions, the defense biggies put up a mixed show. While shares of Northrop, Textron and L3 Technologies gained, that of Boeing, General Dynamics and Raytheon decreased.

The industry's performance has been mixed in the last six months as well. While L3 Technologies gained the most with 24.5% rise in its share price, Textron lost around 10%.

The following table shows the price movement of the major defense players over the past five trading days and during the last six months.

Company Last Week Last 6 Months
LMT 0.01% 12.66%
BA -0.09% 5.32%
GD -1.28% -7.22%
RTN -0.31% -1.45%
NOC 3.29% 11.76%
TXT 0.28% -9.93%
LLL 1.67% 24.49%


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