Defense Stock Roundup: Boeing Forms New Defense Unit, Wins FMS Deal

In the last five trading days, investors remained quite bullish resulting in gains for most of the defense majors. The optimism was backed by The Boeing (NYSE:BA) efforts to restructure its Defense, Space and Security (“BDS”) unit given the tepid budget scenario. This would bring about cost cuts and boost efficiency.

Moreover, FMS – shorthand for foreign military sales – continues to be the trump card for these defense primes. Boeing won an important FMS deal last week.

Investors should also be happy at last as L-3 Communications Holdings (NYSE:LLL) revised its quarterly dividend payment.

(Read for a recap.)

Recap of the Week’s Most Important Stories

1. Boeing is taking vital restructuring measures to cut costs and enhance efficiency at its BDS unit. The company created a new organization – BDS Development – as part of the restructuring of its defense and space business. The move is expected to enhance product efficiency and lower costs for Boeing’s defense customers in addition to maintaining delivery schedules.

One can say that this move to revamp its defense unit by BDS CEO Chris Chadwick was to keep the troubled $52 billion KC-46 aerial tanker program on track. After several technical snags, there have been rising concerns as to whether Boeing will be able to meet the deadline of providing the U.S. Air Force with 18 KC-46 refueling planes by Aug 2017.

Apart from the KC-46 aerial refueling tanker program, the new organization will also oversee the building of the presidential aircraft for the Air Force along with the CST-100 spacecraft for NASA (read more: Boeing Revamps Defense & Space Unit, Eyes Cost Savings ).

2. Boeing clinched a significant foreign military sales (“FMS”) contract from the Pentagon’s daily funding list on Friday, Feb 13. The contract − valued at $402.8 million – calls for Boeing to upgrade four 767-based airborne warning and control aircraft for the government of Japan.

Last October, Boeing began modernizing the Japanese fleet of E-767 AWACS aircraft. The work will allow Japan's AWACS fleet to be more compatible with other AWACS operators in general and the U.S. Air Force AWACS fleet baseline in particular (read more: Boeing to Upgrade Japanese E-767 AWACS Fleet for $403M ).

In a separate development, Boeing’s BDS unit won an order from the satellite fleet operator SES S.A. for a new SES-15 satellite, strengthening SES’ position in the North American government and mobility markets. The satellite is scheduled for delivery in 2017.

This is a part of a contract provided by SES to three manufacturers for three telecommunication satellites. Two of these satellites are all-electric-propulsion spacecraft to be manufactured by Boeing and Airbus Defense and Space. The third conventional-propellant satellite has been awarded to the newly formed Orbital ATK (OA).

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3. Northrop Grumman Corp. (NYSE:NOC) has won a contract from the U.S. Navy valued up to $267 million to design an updated electronic warfare package for surface warships. Northrop will do preliminary work on the third batch of updates to the Navy's AN/SLQ-32(V)Y surface electronic warfare improvement program (“SEWIP”) block three system, through a modular, open-system approach. The program intends to provide the ships with enhanced capabilities for early detection, analysis, threat warning and protection from anti-ship missiles.

4. A Textron (NYSE:TXT) unit, Bell Helicopter, has entered into an agreement with Erickson (NASDAQ:EAC) for assuming product support responsibility of the Bell 214 B and ST models, including technical assistance, maintenance training and maintenance, repair and overhaul services (read more: Textron's Bell Helicopter Signs Agreement with Erickson).

Bell Helicopter, however, lost out to the U.S. unit of Europe's Airbus Group (PARIS:AIR). Airbus won a contract modification worth $220.6 million to build 41 more UH-72A Lakota light utility helicopters for the U.S. Army. As part of the Army's aviation restructuring plan, the TH-67 Creek training helicopters, made by Bell Helicopter, will be replaced with the Lakota.

The Lakota is replacing the Army's OH-58 Kiowa Warrior A and C models, manufactured by Bell. The contract, which runs through Jul 31, 2017, also covers the associated Airborne Radio Communications 231 radio communications system.

5. L-3 Communications Holdings Inc. lifted its quarterly dividend payment by 8%, keeping the shareholder friendly trend in line with the other defense primes. The revised quarterly dividend payment will amount to 65 cents from the previous payout of 60 cents (read more: L-3 Communications Boosts Quarterly Dividend by 8%).

Performance

Overall, the defense stocks showed a bullish stance during the last five trading sessions. While General Dynamics Corp (NYSE:GD). (NYSE:GD) and Raytheon (NYSE:RTN) registered nominal gains, Textron led the pack, followed by Northrop.

The picture in the past six months was also convincing with no losses being noticed. Northrop Grumman (NYSE:NOC) tops the list, followed by L-3 Communications Holdings.

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