Defense stocks moved higher in early trade Wednesday, after General Dynamics reported above-forecast third-quarter results. RTX stock spiked on Tuesday after a Q3 earnings beat. Defense peer Northrop Grumman reports on Thursday.
Rapidly evolving circumstances in Israel and Palestine sparked greater interest in defense companies ahead of the earnings season. RTX stock is up more than 12% since Hamas launched its assault on Israeli civilians on Oct. 7. General Dynamics shares jumped 6% since the outbreak of the conflict while NOC stock rallied 13%. Lockheed Martin beat forecasts for its Q3 results on Oct. 17 and LMT stock is up 10% since Oct. 7.
General Dynamics
General Dynamics collaborates with Lockheed Martin to manufacture F-16 fighter jets. The company also produces wheeled combat vehicles, command and control systems, submarines and business jets.
The Reston, Va. company reported earnings down almost 7% to $3.04 per share. Revenue came in at $10.57 billion, a 6% increase. FactSet analysts expected earnings declines to accelerate for the second quarter in a row, falling 10.4% to $2.92 per share. Wall Street saw 0.8% revenue growth to $10.05 billion.
Incoming orders during the quarter were strong, the company said, led by marine systems and aerospace. Backlog reached $95.6 billion — which company said was the highest in its history.
General Dynamics reached a tentative deal with striking United Auto Workers members in Michigan, Pennsylvania and Ohio late Sunday, ending weeks of negotiations. The four-year deal covers 1,100 workers and includes a 14% wage increase and protections against inflation, reduces time to reach top pay and "beats back the company's proposed health care concessions," according to the UAW. The agreement still has to be ratified by workers.
GD stock surged 4% to 242.43 Wednesday. Shares are trading in a saucer-with-handle base with a 245.06 buy point, MarketSmith data shows. Shares on Tuesday closed 5% below the entry.
Earnings Report Boosts RTX Stock
On Tuesday, RTX reported 3.3% adjusted earnings growth to $1.25 per share on 12% adjusted sales growth to $19 billion. GAAP earnings were a loss of 68 cents per share. That included the impact of the Pratt powder metal defect and accounting adjustments. Including the engine defect, sales fell 21% to $13.5 billion.
FactSet analysts expected the missile and fighter jet components supplier to report a slight uptick in adjusted earnings to $1.22 per share on 9.7% sales growth, to $18.59 billion. Wall Street forecasts had GAAP earnings down nearly 82% to 17 cents per share.
RTX's backlog totaled $190 billion for the quarter, including $115 billion of commercial orders and $75 billion of defense orders.
The company also announced plans to sell its cybersecurity, intelligence and services business within its Raytheon segment for $1.3 billion.
For the year, RTX sees adjusted sales of $74 billion, the top end of its previous forecast. The defense contractor narrowed its adjusted earnings outlook to range between $4.98 to $5.02 per share, compared to the prior range of $4.95 to $5.05 per share. RTX expects free cash flow to improve to $4.8 billion from $4.3 billion.
In addition, the company plans to repurchase $12.8 billion of RTX stock, compared to $3 billion in 2022.
Engine Defect Slows RTX Stock
RTX stock dove in late July after its Q2 earnings beat revealed a manufacturing defect in the powdered metal used for engine parts in its Pratt & Whitney unit.
RTX CEO Greg Hays noted on Tuesday the company made "significant progress" on its assessment of the Pratt & Whitney engine defect and expects the financial impact to be in-line with the previously disclosed charge. Now, RTX is focused on its fleet management plan to mitigate the impact on customers.
Information released in September showed the issue affected hundreds of engines powering A32neo commercial planes made by Airbus. At that time, RTX said an average 350 planes could be grounded per year through 2026. As many as 650 jets could be out of commission in the first half of 2024. RTX expects the recall to cost up to $7 billion, with up to a $3.5 billion hit to pretax earnings over the next several years, including up to a $3 billion impact on pretax results for Q3.
UBS downgraded RTX stock to neutral from buy on Oct. 10 and lowered its price target to $80 from $110. The market looks like it expects $5.5 billion in free cash flow for 2025, compared to company estimates of $7.5 billion, UBS wrote in a research note. RTX has "strong" end markets, but it's difficult to say if the metals issue will be the last to weigh on the 2025 guidance. UBS forecasts free cash flow growing at a 26% compound annual growth rate through 2027.
RTX stock spiked 7.2% Tuesday, jumping to retake its 50-day moving average. Shares over the past two weeks traded at their lowest level since February 2021. RTX stock was flat Wednesday. The stock is down 22.3% in 2023 through Wednesday's close.
Northrop Grumman
Northrop Grumman specializes in advanced missiles, missile components, defense systems and sensor technology. The company's various manned aircraft include the A-10 Thunderbolt, B-2 Stealth Bomber, B-21 Raider, F-35 and the F/A-18 Super Hornet.
Analysts expect Northrop earnings fall for the first time in three quarters, sliding 1.4% to $5.81 per share. Revenue is guided increasing 6.8% to $9.58 billion.
RBC Capital lifted its price target on NOC stock to $515 from 500 on Oct. 16, expecting a favorable reporting season for defense stocks. RBC forecasts low-to-mid single digit sales growth and stronger backlogs, though comparable revenue in the second half of the year may be more challenging. Improvement on defense margins may be muted, but elevated global tensions should amplify positive results and limit downside risk, the firm wrote.
Northrop is well positioned thanks to its "high priority" long-term growth programs including the B-21 and Sentential Ground Based Strategic Deterrent (GBSD), an intercontinental ballistic missile system, UBS wrote in an Oct. 10 research note. The programs provide greater visibility and should drive overperformance. UBS initiated coverage of NOC stock with a buy rating and $555 price target.
NOC stock inched higher Wednesday morning after dipping below its 10-day moving average early in the week. Shares are trading around mid-January levels and down 11.3% this year.
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