Commercial aerospace: Demand for new aircraft at Boeing and Airbus remains robust with combined orders through September of approximately 1,700. Airbus’ introduction of the A320-NEO is largely responsible for the surge in orders with over 1,000 orders for the aircraft. In addition, we have begun to see increased interest from domestic airlines looking to recapitalize their aging fleets following years of underspending.
Defense industry: Over the past few weeks, we have noticed a renewed investor interest in many defense companies. Many investors seem to be drawn toward relatively low valuations (7-8 times earnings for many large-cap defense companies), attractive dividend yields (3-5 percent) and meaningful share repurchases.
Announced daily Department of Defense (DoD) contracts were significantly higher during the third quarter compared to awards last quarter. Total awards announced for the five major defense companies totaled $20.3 billion compared to $11.9 billion during 2Q11 and $14.1 billion during 1Q11. Boeing had announced DoD awards of $3.4 billion ($3.0 billion last quarter) while Lockheed Martin had slightly lower awards quarter over quarter ($3.5 billion versus $3.9 billion). Raytheon’s announced awards increased 50 percent to $3.0 billion due to numerous awards for missile systems.
Northrop Grumman (NOC) also had a healthy increase in orders compared to last quarter, but General Dynamics had the largest increase to $8.5 billion in announced awards compared to $1.5 billion last quarter. The strong order flow at GD was attributable to awards to the Zumwalt destroyers and a sizeable IDIQ contract at C4 Systems.
Northrop Grumman: [The] company reported Q3 2011 EPS of $1.86 compared to our estimate of $1.75 and consensus of $1.68. Results benefited by ~$0.08 from a lower tax rate, which helped to offset a $0.04 headwind from higher below-the-segment line expenses.
Outlook: We are increasing our 2011 EPS estimate by $0.15 due mainly to the results in the quarter and slightly better segment margins. We are reducing our 2012 EPS estimate by $0.05 to $7.15 as a lower sharecount is being offset by lower sales growth.