Aerospace and Defense Companies Navigate Choppy Markets
KippsDeSanto’s upcoming MarketView newsletter details the impact of recent political, budgetary, and economic developments on the outlook for aerospace, defense, and government services companies. This post provides a brief summary of our analysis.
Conditions in Europe with the euro zone debt crisis, combined with a struggling economy in the U.S that led to S&P’s downgrade of U.S. government debt, have caused volatility in equity markets. The turmoil following the downgrade cleared the major indexes of all year-to-date gains before later regaining some ground.
As illustrated in the accompanying chart, commercial aerospace suppliers have continued to outpace the overall market, as industry players signal strong demand for modern, more fuel efficient transport, surpassing their current installed capacity and leading specialized suppliers like Goodrich, Hexcel, and BE Aerospace to raise forecasts. Evidenced by American Airlines’ record setting aircraft order following the recent Paris Air Show, strong downstream demand has helped aerospace valuations remain high despite market turmoil. The purchase – consisting of 460 existing model and re-engined narrow body planes from Airbus and Boeing – could motivate competitors to update their fleets.
In contrast, defense stocks have generally underperformed the overall market over the past few months as concerns grow given troop drawdowns from theatre and the heightened attention paid to the budgetary environment. With the Budget Control Act of 2011 aimed directly at security accounts, investors are shifting away from the sector, causing many companies to either postpone or cancel IPOs due to anemic demand. For example, ADS Tactical, a provider of products and apparel for military and tactical operations, withdrew its planned IPO, citing unfavorable market conditions.
Some public companies flush with cash have attempted to counteract current market conditions by employing stock buybacks. Such tactics appear to be working and have helped many companies limit stock declines through the market downturn. After repurchasing 6% of shares outstanding in the past several months, Lockheed Martin, the world’s largest defense supplier by sales, beat analysts’ earnings estimates by $0.21 per share. In continuing its efforts to “right-size the business,” Lockheed has furthered its program of layoffs and buyouts given the current environment. Lockheed’s actions demonstrate how defense suppliers, large and small, are proactively positioning to best navigate what is likely to be a challenging next few years.
(1) Capital IQ and KippsDeSanto research
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