Defense Earnings: Winners and Losers

by Louis Navellier | April 25, 2013 10:21 am

We are starting to see earnings from the aerospace/defense sector, and they have been pretty much in line with our expectations. The group is not expected to be a stellar performer, as many are feeling the effects of sequester and related spending cuts. Companies specializing in defense work will probably see more lasting cutbacks as virtually all of the budget proposals so far include reductions in defense spending.

Let’s look at the major players — with the help of Portfolio Grader[1] — to see how the sector is doing so far.

Industry leader Boeing (NYSE:BA[2]) reported Wednesday morning, and earnings again topped expectations. Revenues were down slightly as battery problems led to just one 787 being delivered in the quarter, but that should pick up during the rest of the year. The company has continued to produce the planes and plans to deliver 60 of the aircraft by the end of 2013. The lack of 787 deliveries was offset by rapid production of 737 and 777 aircrafts, and the company delivered 137 aircrafts in the first three months of the year. In spite of the well-publicized 787 problems, the company continues to perform and is rated a buy in Portfolio Grader.

The picture is not as bright for Lockheed Martin (NYSE:LMT[3]). The defense contractor posted earnings that exceeded the pessimistic Wall Street projections, but warned that the rest of the year does not look as strong. They reduced revenue forecasts for 2013 as sequestration could lead to a 10% sales decline. The stock was downgraded by Portfolio Grader back in March as the spending cuts hurt fundamentals, and is now rated a hold.

Northrup Grumman (NYSE:NOC[4]) was more upbeat when they reported earnings Wednesday morning. The company posted a positive earnings surprise for the fifth consecutive quarter and is standing by its revenue and profit forecasts for the full year. The weapons manufacturer is using its cash flow to buy back stock and reduced its share count by 7% in the quarter, which should boost EPS for the rest of the year. The stock was upgraded by Portfolio Grader in March and remains a buy after the strong earnings report.

Another bright spot in the defense sector is personal protection and security device manufacturer Taser (NASDAQ:TASR[5]). After several years of losses the company returned to profitability last year, and that trend is expected to continue in 2013. Sales to law enforcement agencies remain very strong as departments upgraded to the new XR electronic device and added officer cameras to their crime fighting arsenal. The company has reported a huge positive surprise in 3 of the past 4 quarters, and I would not be surprised to see that trend continue when they report earnings tomorrow.

The aerospace and defense sectors have had a strong couple of years, but sequestration and planned defense spending cuts could cause fundamentals to deteriorate as we go into the rest of 2013. Once all the earnings reports from the sector are in, we will review these stocks in Portfolio Grader and see which rankings begin to fall and should be avoided.

Louis Navellier is the editor of Blue Chip Growth[6].

  1. Portfolio Grader:
  2. BA:
  3. LMT:
  4. NOC:
  5. TASR:
  6. Blue Chip Growth:

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