Facing shrinking defense spending budgets and increased pressure from China and Russia, major U.S. defense contractors have had to make major decisions. Revenue for makers of fighter jets, ground combat vehicles, missile systems and unmanned military vehicles has been declining steadily since 2011 as Western countries, led by the U.S., rein in their defense budgets. The global commodities rout, led by plummeting oil prices, has checked spending in foreign markets while a strong U.S. dollar has hurt profits on sales in foreign currencies.
With all the so-called headwinds in global defense, expectations are low for American aerospace and defense heavies like General Dynamics, Lockheed Martin, Northrop Grumman, Boeing and Raytheon, who report their October-to-November earnings performances this week. Investors want to know if the worst is over or not.
“I believe that 2016 is probably the bottom and then I think you’ll see small yet gradual increase in revenues in 2017,” said Andrew Hunter, an expert in international security and defense at the Center for Strategic and International Studies (CSIS), a Washington think tank. “But the increase in U.S. defense spending will go up less rapidly than the [U.S.] defense budget is expected to in 2017.”
In the face of these shrinking budgets, defense contractors had been focusing on their most profitable offerings while reducing headcounts, by 2.6 percent annually since 2009, according to AlixPartners. “But their current revenue decline isn’t sustainable, so they’ll need to transform themselves in more aggressive ways to drive fresh growth,” says a recent report from the global business consultancy group. “Some companies are also using M&A [mergers and acquisitions] to move into key growth sectors, such as electronics, cybersecurity, and civil aerospace.”
One example of this has been Tomahawk missile maker Raytheon’s acquisition of a controlling stake in Websense last year in an effort to get into the commercial cybersecurity business.
Right now the companies more heavily reliant on defense contracts are hurting the most while companies with strong non-defense businesses, such as General Dynamics’ natural gas container ships or Boeing’s 737s, will fare better as the airline industry has been reaping the benefits of rapidly expanding Asian market -- though the largest defense contractors, like Lockheed Martin, may be already experiencing a turnaround.
The following defense industry majors will report earnings this week. Share prices are based on Monday stock readings and forecasts are provided by analysts polled by Thomson Reuters.
Tuesday Before Markets Open
After completing its acquisition of Blackhawk helicopter maker Sikorsky Aircraft in November, Lockheed Martin Corporation (NYSE:LMT) should see in the its fourth-quarter earnings report both some benefits from the acquisition as well as a partial write-down expense on the $9 billion purchase of the Connecticut company. The Sikorsky purchase from rival United Technologies Corp. was the biggest in defense in two decades, the Wall Street Journal reported.
Lockheed Martin is expected to report unadjusted earnings per share of $2.92 on $902.9 million in profit in the three months ending in December, up from $2.82 per share on profit of $904 million in the same quarter the previous year. Revenue is expected to dip to $12.36 billion from $12.53 billion. Shares in the world’s largest defense contractor grew 7.3 percent over the past 12 months and are down 2.5 percent since the start of the year, performing better than the Standard & Poor's 500 Index, which is down 7.5 percent for the year. (Update: Click here for earnings results.)
Wednesday Before Markets Open
January isn’t over yet and already General Dynamics Corporation (NYSE:GD) has won contracts with the U.S. Army to design and build a 30-mm cannon for Stryker infantry-carrier vehicles and with the U.S. Navy to improve electronics for surface-ship defenses. Meanwhile the company has received the most orders for its civilian Gulfstream aircraft since 2011, bucking a larger slowdown in demand for executive jets.
General Dynamics is forecast to report unadjusted fourth-quarter 2015 earnings per share of $2.28 on profit of $733 million, up from $2.09 per share on profit of $701 million. Revenue is expected to dip to $8.24 billion from $8.36 billion. Shares in one of the world’s top defense contractors have dipped 11.8 percent over the past 12 months and 9.3 percent since the start of the year. (Update: Click here for earnings results.)
Dow component United Technologies Corporation (NYSE:UTX) is wrapping up its sale of Sikorsky Aircraft to Lockheed Martin, and announced earlier this month that former Sikorsky boss Robert Leduc would succeed Paul Adam as chief of Pratt & Whitney, United Technologies’ aircraft-engine making subsidiary. The Sikorsky spinoff suggests United Technologies wants to focus more on its non-military side of tis operations, which includes making HVAC systems and elevators for office buildings, though Pratt & Whitney remains a major player in air defense, making and servicing engines that power F-35s, F-22s, F-16s and other fighter jets in 22 countries.
United Technologies is expected to report fourth-quarter unadjusted earnings per share of $1.54 on $1.39 billion in profit from $1.62 on profit of $1.47 billion in the same period the previous year. Revenue is expected to drop to $15.35 billion from $17 billion. The company’s stock has fallen 29.2 percent over the past 12 months and has fallen 11.6 percent since the start of the year. (Update: Click here for earnings results.)
Despite being the world’s second-largest defense contractor, Boeing Co. (NYSE:BA) is also one of the biggest makers of civilian aircraft along with its main rival Airbus. While the company is poised to take a massive accounting loss for cutting 747 jumbo-jet production amid a drop on demand for cargo aircraft, the carrier maker is going to see brisk business later in the decade as demand for both cargo planes and smaller commercial jets.
Boeing is expected to report fourth-quarter unadjusted earnings per share of $1.54 on $1.08 billion in profit from $2.02 on profit of $1.47 billion in the same period the previous year. Revenue is expected to drop to $23.55 billion from $24.47 billion. The company’s stock has fallen 7.9 percent over the past 12 months and has fallen 14.2 percent since the start of the year. (Click here for earnings results.)
Thursday Before Markets Open
Northrop Grumman Corporation (NYSE:NOC) started the fourth quarter of 2015 with a major U.S. defense contract win: a deal worth up to $80 billion deal to make U.S. Air Force’s Long-Range Strike Bomber, the next generation of the stealthy, bat-like strategic heavy payload dropper. It was the first bomber contract for the B-2 maker since the 1980s, according to Bloomberg. The company has also won key deal related to the U.S. Navy’s Littoral Combat Ship and MQ-4C Triton Unmanned Aircraft System.
The Virginia aerospace and defense company is forecast to report unadjusted earnings per share of $2.01 on $372.9 million in profit from $2.48 on profit of $506 million. Revenue is expected to drop to $5.94B from $6.11B. Northrop Grumman shares are up 16.5 percent for the past 12 months and are down 3.6 percent since the start of the year.
Oshkosh Corporation (NYSE:OSK) is facing a legal challenge from rival Lockheed Martin over a $6.75 billion deal to create the replacement of the U.S. Army’s and U.S. Marine Corps HMMWV (aka Humvee) multipurpose combat vehicle, indicating both how both cloistered and deeply competitive lucrative defense contracts can be. Wisconsin's Oshkosh has said it’s confident the court will uphold its Joint Light Tactical Vehicle contract.
As the maker of heavy land vehicles, Oshkosh is heavily dependent on the need for troop transport.
Oshkosh is expected to report unadjusted earnings per share to 14 cents on $3.42 million in profit, down from 43 cents on profit of $34.6 million. Revenue is seen dropping to $1.20 billion from $1.35 billion. The company’s shares are down 20.8 percent over the past 12 months and 16 percent since the start of the year.
Raytheon Company (NYSE:RTN) is a major manufacturer of missiles but has been one of the more successful companies in the defense industry to growth a commercial cybersecurity business. One of the biggest deals of its kind in 2015 involved the Massachusetts defense contractor completing a deal in the last days of its fourth quarter that started last spring after it purchased Websense. The new company, called Forcepoint, will be widely watched this year to see if a defense-related company can gracefully slide into the world of guarding company data from hackers.
Raytheon is forecast to report unadjusted earnings per share in the three quarters ending in December to $1.78 on $538 million in profit, up from $1.88 on profit of $582 million. Revenue is seen rising to $6.30 billion from $6.14 billion. Raytheon shares have risen 11 percent over the past 12 months and have fallen 4.8 percent since the start of the year.