6 Stocks That Never Surrender

It's earnings season again on Wall Street, folks, and you know what that means.

Disappointment …

Elation …

And significant shifts in market cap:

Source: Yahoo! Finance.
*Tracking began on July 10, 2009. Portfolio is equal-weighted, with "recent price" being set at market close on the Friday preceding publication, and adjusted for stock splits and dividends.

Within the defense industry, just about everybody who's anybody (at least anybody large-in-cap) reported their earnings last week. Here's a quick rundown of the highlights.

The good ...
Good news came to our Defense Portfolio in the form of boffo earnings news out of Lockheed Martin and Raytheon, each of which beat Wall Street's expectations for last year, and reaffirmed or raised guidance for this year -- but took different routes to get there.

Lockheed did its part by earning a little less in 2009 ($7.78 per share) than it had in 2008, and predicting it would earn still less money in 2010 ($7.25, give or take a dime). Not great news, exactly, and the shares are trading down as a result. But the company also reported that it bought back a heaping helping of its own shares last year, and intends to continue buying into 2010. (So apparently, I'm not the only person who thinks these shares are a bargain.)

Meanwhile, as Lockheed took the low road, Raytheon commanded the heights. Not only did it beat earnings last week -- it did so by posting double-digit profits growth for Q4 and the year. Raytheon's furthermore sending a strong bullish signal about its fortunes, buying shares even as they soar above the S&P's gains.

The not so bad ...
Non-defense portfolio companies -- but admirable defense companies in their own right -- L-3 Communications (NYSE:LLL), Honeywell (NYSE:HON), and United Technologies (NYSE:UTX) mimicked Lockheed and Raytheon to greater or lesser extents. Each beat its quarterly estimates and either confirmed, or raised, its guidance for the current year as well. Of these three, L-3 appears to have had the strongest year as its earnings climbed strongly. Free cash flow showed some improvement as well, as operating cash flow inched up, and capital expenditures ratcheted down a bit.

And the ugly
Less impressive were the reports out of General Dynamics, Textron, and Boeing (NYSE:BA). For while Textron and Boeing exceeded the Street's expectations by a wide margin, and General D slightly beat expectations, each of these megadefense players warned investors to expect less of the same over the months to come. General D predicted its earnings would fall several cents short of the analysts' predicted $6.53 this year. Textron says its earnings are going to come in about 50% light.

Meanwhile, Boeing struck fear into the hearts of balance sheet watchers, warning that its cash flow this year would approximate zilch. Matters are expected to improve in 2011, when the plane-builder hopes to begin building planes (i.e., Dreamliners) in earnest. But if problems should crop up in the 787 between now and then, and delay production at all, things could get ugly in a hurry. (But hey, what are the chances of that happening?)

Bringing it all together
When you get right down to it, though, the big defense firms held up their end of the investing bargain pretty well last week. We put our faith -- and our money -- into their stock. They didn't disappoint us (well, not too much) or hurt our portfolios (too badly.) Fact is, were it not for the steep declines at Defense Portfolio members iRobot and Force Protection -- neither of which reported much of anything, by the way -- last week, the Portfolio as a whole would actually be beating the market right now.

But will we be able to say the same thing one year from now? I'm not so sure. You see, after reviewing all the earnings reports from all of last week's complex military industrialists, I've pulled together a couple of common themes -- themes which will work against us over the quarters to come:

The first big theme to focus on is pensions. Ye Olde Defense Guarde tends to carry pension funds, you see. And these pension funds invest in stocks, and when these stocks decline in value (like, say, during a recession), the pension funds tend to spring leaks. Shoring up leaky pension funds requires making additional capital contributions, and that's just what Lockheed, Raytheon, United Tech, and Boeing had to do last year. Most of these companies warned that they'll need to keep pouring money into their funds in 2010 -- and that's going to weigh on profits.

The other thing you need to watch is backlog. It's down almost across the board -- at Lockheed, at Raytheon, L-3, and Boeing. And a lousy business jet market won't be helping backlogs at Textron and General Dynamics. For anyone counting on revenue growth to spur higher stock prices going forward, this bodes ill.

Foolish takeaway
No two ways about it, Fools, the defense industry is in for some turbulence as we fly deeper into 2010. The good news, though, is that our companies seem almost uniformly well-suited to survive it. Honeywell, Boeing, and General Dynamics in particular all made a point of noting that their free cash flow last year exceeded net income-as-calculated-under-GAAP. So as cheap as many of these companies look today, they're actually even cheaper.

So buckle up and buckle down, investors. It'll be a rough ride to be sure, but we'll get through it together.

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