For Immediate Release
Chicago, IL – April 13, 2010 – Zacks.com announces the latest Industry Outlook. Today, Zacks Equity Research discusses the Aerospace & Defense Industry, including Lockheed Martin Corporation (LMT), Boeing Company (BA), United Technologies Corporation (UTX) and Honeywell International Inc. (HON).
A synopsis of today’s Industry Outlook is presented below. The full article can be read at http://www.zacks.com/stock/news/32768/Aerospace+and+Defense+Stock+Review+-+Apr.+2010.
Inherently big defense contractors are expected to eliminate jobs as the Pentagon has lowered spending on traditional weapon systems, while smaller, niche companies may accelerate hiring as the United States garners resources to protect ground troops and strategic computer networks.
Industry pioneer Lockheed Martin Corporation (LMT) aims to reduce 600 jobs as a result of the US Defense Department’s decision to terminate the VH-71 presidential helicopter program. Boeing Company (BA) hinted that Pentagon cuts would claim 1,000 jobs in its defense business, affecting staffing at various work sites in the United States in missile defense and in the Army’s Future Combat Systems modernization program, which is now being opened to more competition.
The large commercial aircraft sector is expected to generate most of its revenue from Asia-Pacific-Japan (APJ) and the Middle East, relying less on U.S. orders because of the current economic climate. However, airline companies worldwide will continue to struggle with the global economic recession, fuel price fluctuations and the difficulty in raising ticket prices. Despite robust business aviation forecasts, there may be short-term customer financing challenges for business jets segment.
With core defense spending expected to slow, U.S. defense contractors need to identify additional revenue sources for the coming years. There is potential for interesting merger and acquisition (M&A) activity, mostly smaller deals by larger A&D firms to fill in capability gaps — particularly in the security, defense electronics and aftermarket services business areas.
U.S. defense firms may see opportunities in credit-squeezed markets to pick up U.S. assets at historically low price-earnings multiples. Some large companies are expanding into the adjacent markets of mission support and services, such as performance-based logistics, or PBL, which can provide a more consistent, albeit riskier, and perhaps more profitable, revenue stream.
Building on the example set by engine manufacturers Pratt & Whitney (a United Technologies Corporation [UTX] company) and Rolls-Royce Group — to get 50% of revenues and 60% of profits from their services business — Aerospace & Defense contractors are learning how to take on, measure and internalize risk and to make support and services offerings profitable. This includes understanding how to service the equipment they manufacture, and assembling the necessary infrastructure, capabilities and people to operate it.
Companies are also leveraging strong balance sheets to grow organically and acquire new services business. As product development transitions to production program deliveries, it is anticipated that companies will ramp up their services businesses and profitability should improve.
Overall, in the next two decades, Boeing Company forecasts delivery of 29,400 new commercial aircraft worth $3.2 trillion. Honeywell International Inc.’s (HON) forecast predicts 17,000 new business aircraft valued at $300 billion. While we currently don’t have an Outperform recommendation on aircraft and engine manufacturers, we have positive outlooks on UTX, BA and HON.
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