Howard A. Rubel
Jefferies & Company Inc.
We believe aerospace stocks are likely to benefit from the ongoing recovery in global traffic and yields. While the Obama Administration’s decision to add resources to the war in Afghanistan will likely put-off an eventual contraction of the overall defense budget, the longer-term outlook for defense stocks remains generally muted.
As the services contemplate the ripple effect that the F-35 delays might have on their fleet planning strategies, we learned this week that the Air Force is looking at a possible F-16 life extension program. Further, the U.S. Navy is reviewing a recent offer from Boeing to build 124 F/A-18s under a multi-year contract that would save the service 10 percent.
We continue to rate the shares of Northrop Grumman (NOC) BUY. Our EPS estimates for 2010 and 2011 remain unchanged at $5.85 and $6.85, respectively. We continue to rate the shares of Boeing BUY, and our EPS estimates for 2010 and 2011 remain unchanged at $4.15 and $4.70, respectively.
Troy J. Lahr
The President submitted to Congress a fiscal 2011 request of $549 billion for the core Department of Defense budget. The growth of 3 percent in the core budget was relatively in line with expectations. In addition, there was a $159 billion budget request for wartime supplemental spending in FY11 and another $33 billion in supplemental spending requested for FY10.
The Department of Defense budget for Fiscal Year 11 calls for a 4 percent increase in the support account and a 2 percent increase in the investment account. While the support account is slowly becoming more important to defense companies as they push into services work, the investment accounts remains the bread and butter for companies in the industry.
Outlook (for NOC): We are increasing our 2010 EPS estimate from $5.45 to $6.00 mainly due to a more favorable pension adjustment partially offset by lower sales. We are increasing our 2011 EPS estimate from $6.05 to $6.65 for similar reasons.