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Defense Stock Roundup: UTX-COL Sealed Merger News Hit Stocks, HII Wins Big

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The U.S. aerospace and defense industry grabbed investors’ attention this week on the back of two significant developments. On Sep 5, defense stocks surged following North Korea’s ‘successful’ hydrogen bomb test — largest nuclear device test since 2006.

The U.S. administration strongly condemned the act, wherein the U.S. Defense Secretary James Mattis warned North Korea of dire consequences if the nation goes on encouraging such violent operations. This in turn boosted defense stocks on anticipation of escalated military actions from the United States.


The finalization of the merger between United Technologies and Rockwell Collins however, dragged down defense stocks. The aerospace giant Boeing raised strong objections against the merger citing the deal’s potential to hinder competition in the aerospace supply chain market. This may have raised skepticism surrounding the deal.

Meanwhile, keeping up with the trend, defense stocks continued to receive generous flow of funds from the Pentagon.

Coming to the performance of the major indices of the Aerospace sector, in the last five trading sessions, the stocks ended up in the red zone. Notably, the S&P 500 Aerospace & Defense (Industry) Index dropped 2.6%, while the Dow Jones U.S. Aerospace & Defense Index dipped 2.3% during this period.

Among last week’s highlights, defense primes Huntington Ingalls Industries Inc. HII, The Boeing Company BA and Orbital ATK, Inc. OA secured notable contracts from the Department of Defense (DoD). Moreover, Rockwell Collins Inc. COL and United Technologies Corp. UTX finalized their merger deal.

(Read Defense Stock Roundup for Sep 1, 2017 here)

A Look Back at Last Week’s Key Stories

1. Military shipbuilder, Huntington Ingalls’ unit, Newport News, clinched a contract worth $2.8 billion, to support the refueling and complex overhaul of USS George Washington (CVN73). Work for this deal will be over by August 2021.

The contract was awarded by the Naval Sea Systems Command, Washington Navy Yard, Washington, D.C. Per the deal, Huntington Ingalls will carry out the work in Newport News, VA. The company will utilize fiscal 2017 and 2016 shipbuilding and conversion (Navy) funds to complete operations (read more: Huntington Ingalls' Unit Wins $2.8B Deal From US Navy).

The company’s Newport News business segment won another contract from the U.S. Navy during the past five trading sessions. This one is a modification contract worth $105 million that Huntington secured for upgrading nuclear submarines. Work related to the deal is scheduled to be over by September 2019.

Per the terms of the agreement, Huntington will provide engineering, technical, design, configuration and database management as well as integrated logistics support for the ships. In addition, the company will also offer research and development, modernization and industrial support for submarines. The modification related task will be executed at the Newport News shipyard, in Virginia (read more: Huntington Ingalls Wins $105M Deal for Nuclear Submarines).

2. Aircraft major Boeing announced that it is one of the six companies to receive the Aerospace Systems Air Platform Technology Research program contract from the U.S. Air Force. The deal has a ceiling value of $499 million.

Per the contract, the company will be responsible for providing quality research for affordable, revolutionary capabilities for the warfighter. It was awarded by Air Force Research Laboratory, Wright-Patterson Air Force Base, OH. Boeing expects to complete the task by Aug 31, 2025, at its Hazelwood, MS facility (read more: Boeing Secures $499M Contract From U.S. Air Force).

3. Defense prime Orbital ATK won a contract worth $157 million from the U.S. Navy, for manufacturing 6th lot of Advanced Anti-Radiation Guided Missile (AARGM). Per the terms of the deal, the company will convert AGM-88B High Speed Anti-Radiation Missiles into 230 AGM-88E AARGM All-Up-Rounds and six captive air training missiles.

Majority of the work related to the contract will be carried out at Northridge, CA. Notably, AGM-88E are supersonic, medium-range, air-launched tactical missiles, compatible with all variants such as F/A-18, Tornado, EA-18G, F-16, EA-6B and F-35 (read more: Orbital ATK Secures $157M Contract from the U.S. Navy).

4. Rockwell Collins announced that it has finally reached a definitive agreement with United Technologies. Per the deal, the former will be acquired by the latter for a total transaction value of $30 billion. The deal is projected to wrap up by the third quarter of 2018, depending on consents from Rockwell Collins’ shareowners and other customary closing conditions, including the receipt of required regulatory approvals.

United Technologies expects the acquisition to be accretive to its adjusted earnings per share after the first full year, following the deal’s closure. The takeover is estimated to generate more than $500 million of run-rate pre-tax cost synergies by the fourth year.

On completion, Rockwell Collins and United Technologies’ Aerospace Systems will be integrated to form a new business unit named Collins Aerospace Systems (read more: Rockwell Collins Clinches $30B Deal With United Technologies).

Performance

Over the last five trading sessions, most of the defense biggies, except Raytheon Company RTN and Rockwell Collins, put up a dismal show. Notably, shares of General Dynamics Corp. GD lost the maximum, 2.32%, in the last five days, followed by Northrop Grumman Corp. NOC.

On a bright note, over the last six months, the entire industry has put up a stellar performance. Rockwell Collins gained the most, with its shares rising 34.73%, followed by Boeing.

The following table shows the price movement of the major defense players over the past five trading days and during the last six months.

CompanyLast WeekLast 6 Months
LMT-1.44%12.41%
BA-1.92%29.84%
GD-2.32%2.91%
RTN1.90%17.44%
NOC-2.07%9.03%
COL0.41%34.73%
TXT-0.83%1.80%
LLL-0.30%7.35%

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