Defense Stock Roundup: Trade War Fears Re-Emerge, Earnings Beat at HII, LLL & RTN

The Q2 earnings season is set to enter its last leg, with more than 381 S&P 500 companies having released their quarterly numbers as of Aug 2. Of these index members, 80.1% delivered an earnings beat while 73.8% surpassed revenue estimates. Notably, for the S&P 500 index as a whole, total Q2 earnings are expected to grow 23.9% from the figure registered in last year’s second quarter on 9.3% revenue growth.

Coming to projection for the Zacks Aerospace sector, Q2 earnings for the stocks in this space are expected to improve 24.4% year over year on 7.7% sales growth, as of Aug 2.

However, such impressive numbers failed to drive the defense stocks over the last five trading sessions because of the broader stock market’s dismal performance. In particular, the Trump administration’s announcement to raise the rate of proposed tariffs from 10% to 25% on $200-billion worth of goods from China triggered possibility of trade war, rattling the global stock market. Consequently, major indices of the Aerospace-Defense space — both the S&P 500 Aerospace & Defense (Industry) and the Dow Jones U.S. Aerospace & Defense index slipped 1.4% in the trailing five trading session.

Nevertheless, quarterly results from a number of Aerospace-Defense majors, namely Harris Corporation HRS, Huntington Ingalls Industries, Inc. HII, Spirit Aerosystems Inc. SPR, L3 Technologies, Inc. LLL, Raytheon Company RTN and Leidos Holdings, Inc. LDOS remained a key area of investors focus.

Recap of Past Week’s Important Stories

1. Harris Corp’s fourth-quarter fiscal 2018 GAAP earnings from continuing operations increased to $1.74 per share from $1.35 in the year-ago quarter on top-line growth and tax benefit. Revenues in the quarter increased 8% year over year to $1,666 million and surpassed the Zacks Consensus Estimate of $1,618 million.

In fiscal 2018, the company generated $751 million as cash from operating activities compared with $569 million a year ago.

Harris Corp expects to realize revenues in the range of $6.53-$6.65 billion in fiscal 2019, up 6-8% from fiscal 2018 (read more: Harris Surpasses Q4 Earnings and Revenue Estimates).

2. Huntington Ingalls’ second-quarter 2018 earnings of $5.40 per share outpaced the Zacks Consensus Estimate of $4.21 by 28.3%.Total revenues came in at $2.02 billion, which exceeded the consensus mark of $1.90 billion by 6.2%.

Huntington Ingalls received new orders worth $1.1 billion in the second quarter. As a result, the company’s total backlog reached $21 billion as of Jun 30, 2018.

At the end of second-quarter 2018, cash from operating activities totaled $359 million compared with $284 million at the end of 2017’s second quarter (read more: Huntington Ingalls Q2 Earnings Top, Revenues Up Y/Y).

3. Spirit AeroSystems reported second-quarter 2018 adjusted earnings of $1.63 per share, which came ahead of the Zacks Consensus Estimate of $1.51 by 7.9%. However, total sales of $1,837 million missed the Zacks Consensus Estimate of $1,855 million by 1%.  

Backlog at the end of second-quarter 2018 was $47 billion, flat with the prior-quarter’s figure.

Cash flow from operating activities increased to $397.2 million at the end of second-quarter 2018 from $334 million at the end of second-quarter 2017 (read more: Spirit AeroSystems Q2 Earnings Beat, Revenues Lag).

4. L3 Technologies reported second-quarter 2018 adjusted earnings of $2.47 per share from continuing operations, which trumped the Zacks Consensus Estimate of $2.30 by 7.4%. In the quarter under review, total revenues came in at $2.58 billion, outpacing the Zacks Consensus Estimate of $2.48 billion by 4.1%.

Funded orders totaled $2.8 billion, reflecting a 32% rise compared with last year’s number.

L3 Technologies raised its 2018 guidance. The company now expects adjusted earnings to be in the range of $9.80-$10.00 per share compared with $9.40-$9.60 guided earlier (read more: L3 Technologies Beats on Q2 Earnings, Hikes '18 View).

5. Raytheon reported second-quarter 2018 adjusted earnings per share (EPS) from continuing operations of $2.45, beating the Zacks Consensus Estimate of $2.32 by 5.6%. The company's second-quarter revenues totaled $6,625 million, which increased 5.5% on a year-over-year basis.

Raytheon's bookings in the quarter amounted to $8,694 million compared with $6,532 million in the year-ago quarter, reflecting a surge of 33.1%.

Raytheon ended the second quarter with cash and cash equivalents of $3,094 million, down from $3,103 million as of Dec 31, 2017. The company raised its 2018 guidance for the top and bottom line (read more: Raytheon Beats on Q2 Earnings, Raises '18 Guidance).

6. Leidos Holdings posted second-quarter 2018 adjusted earnings of $1.12 per share, which outpaced the Zacks Consensus Estimate of $1.05 by 6.7%. Total revenues came in at $2,529 million, which lagged the Zacks Consensus Estimate of $2,563 million by 1.3%.

At the end of second-quarter 2018, the company’s backlog of signed business orders was $18.3 billion, of which $5.4 billion was funded.

Cash and cash equivalents as of Jun 29, 2018 were $303 million compared with $390 million as of Dec 29, 2017. Leidos Holdings reaffirmed its guidance for 2018 (read more: Leidos Holdings (LDOS) Beats on Q2 Earnings, Revenues Lag).

Performance

Over the last five trading sessions, majority of defense biggies put up a dismal show, except Lockheed Martin. Notably, General Dynamics lost the most with 2.3% share price decline, followed by Northrop Grumman.

The industry's performance over the last six months has been a mixed bag. Textron gained the most, with its shares rallying 18.3%, followed by Boeing. However, General Dynamics lost the most with its share price having dropped more than 8%.

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	0.17%	-4.73%
BA	-0.67%	5.95%
GD	-2.30%	-8.65%
RTN	-0.19%	-1.29%
NOC	-1.46%	-7.79%
COL	-0.35%	2.00%
TXT	-0.04%	18.25%
LLL	1.42%	-4.88%