I've got four words for defense investors this week: "Down, but not out."
Sure, we're still lagging the market. But things are looking up for the defense sector, finally. Based on Thursday's market closing prices, we've now notched back-to-back wins against the S&P 500, and are closing the gap fast -- 0.8 percentage points in last week's report, and another 1.4 percentage points today. Without further ado, here's our weekly progress report:
|
Company
|
Starting Price*
|
Recent Price
|
Total Return
|
|
General Dynamics
|
$51.54
|
$59.95
|
16.3%
|
|
Raytheon (NYSE: RTN )
|
$42.27
|
$47.76
|
13%
|
|
Lockheed Martin (NYSE: LMT )
|
$77.69**
|
$74.97
|
(3.5%)
|
|
AeroVironment
|
$29.96
|
$28.50
|
(4.9%)
|
|
iRobot
|
$11.49
|
$12.08
|
5.1%
|
|
Force Protection
|
$4.57
|
$5.39
|
17.9%
|
|
AVERAGE RETURN
|
|
|
7.3%
|
|
S&P Spyder
|
$88.17
|
$103.40
|
17.3%
|
|
DIFFERENCE
|
|
|
(10)
|
Source: Yahoo! Finance.
*Tracking began on July 10, 2009. Portfolio is equal-weighted, with "recent price" being set at market close on the Thursday preceding publication, and adjusted for stock splits and dividends.
** Adjusted for dividends.
Northrop leads the way
The best news of last week in the defense sector actually accrued to a company not on our list -- naval and aerospace leader Northrop Grumman (NYSE: NOC ) . Northrop started off the week with a big contract win to provide cybersecurity support to the U.S. 1st Information Operations Command (Land).
Worth $430 million over five years, this "indefinite delivery, indefinite quantity" contract takes a big step toward the Obama administration's promise to bolster U.S. IT security against attacks from abroad. (Such as the April incident in which Chinese hackers allegedly stole millions of dollars worth of sensitive data on Lockheed's new F-35 joint strike fighter.)
A day later, the Associated Press reported that Northrop landed a $7 million contract to "provide spare equipment at bases using the Global Hawk." Now granted, seven mil is a piddling sum to Northrop. But it does reinforce the view that the U.S. military is committed to its investment in the company's ultra-high-altitude UAV offerings -- and it wasn't the only pie in the sky Northrop got.
A billion here, a billion there ...
... and pretty soon you're talking $5.8 billion, which is real money even to Northrop. On Wednesday, the company landed two megacontracts in quick succession:
- A $3.4 billion contract expansion for supporting the Air Force's fleet of B-2 20 stealth bombers, which lifted the total value of this contract to $9.5 billion; and
- A $2.4 billion contract to refuel and upgrade the nuclear-powered aircraft carrier USS Theodore Roosevelt.
Combined, these two contracts amount to about 17% of Northrop's annual revenues -- not bad for a day's work.
Elsewhere in aerospace
The other big winner last week was Northrop archrival Boeing (NYSE: BA ) . Boeing gained 11% on the week, primarily in response to Thursday's announcement of a new-and-improved delivery schedule for its 787 commercial airliner. And promises aside, Boeing actually booked some sales last week as well, when Canada's WestJet ordered 14 Boeing 737s for its fleet, a deal valued at more than $800 million.
Last and least, investors experienced a "what the heck?" moment at Boeing, when the news was announced that the U.S. Navy is giving Boeing $25 million to update its P-8A Poseidon.
Why is this strange? Well, it was only four weeks ago that Boeing unveiled the Poseidon and laid out its delivery schedule for the Navy. I mean, $25 million gives an added jingle to Boeing's collection of pocket change, sure. And Boeing sure could use the cash. But investors have to wonder just why modifications are being requested so soon after Boeing revealed the plane. Seems to me, there must have been something about the plane that the Navy just didn't like the look of.
And back on solid ground ...
The biggest story in security stocks, though, appears to be the one that hasn't happened yet. You may recall that back in April, General Electric (NYSE: GE ) sold a majority stake in its Homeland Protection unit (GEHP) to the French (a decision that I criticized as ill-considered).
Now, rumors are flying that GE will follow up on April's sale by divesting GEHP's entire parent division, "GE Security," which manufactures such hi-tech devices as surveillance cameras and alarm systems (used, among other things, for monitoring U.S. borders). Tyco International (NYSE: TYC ) and United Tech (NYSE: UTX ) were both named as potential purchasers.
Bloomberg reports that a sale of the unit could be worth as much as $2 billion to GE, but it's hard to say whether that's a good price until we know more details about the transaction. In the meantime, there is one thing I'm certain of: GE's getting smaller.
Foolish final thought
And one thing more: If GE is truly the best company the S&P has to offer, I'm confident that our portfolio of stable, value-priced large defense contractors, and zippy up-and-comers, will beat it with a stick. Just give 'em some time, and never surrender.
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