(By Mani) The second quarter earnings season for the global Aerospace & Defense sector kicks off this week, with many of the large cap companies reporting results over the next three weeks.
Aerospace earnings this quarter are expected to be generally robust, while the aftermarket is again up against tough comps this quarter, but the sequential progress is likely to have been steady, with a better second half expected.
Aftermarket growth rates will be mixed in the quarter, suggesting investors prefer original equipment-exposed names given large backlogs at Boeing/Airbus, good revenue growth potential, high operating leverage, and attractive valuation.
"We would be buyers of Precision Castparts, Triumph Group, Embraer, and Boeing heading into the Q," Deutsche Bank analyst Myles Walton wrote in a note to clients.
Meanwhile, defense companies don't tend to see radical changes from quarter to quarter, and would be a continuation of soft revenues/good margins pattern of recent quarters, with a potential EPS kicker from buybacks. However, earnings beat could be offset by increasing concern over the looming sequester in the US.
"We'll be interested to see if the uncertainty of the fiscal cliff has continued to impact 'short cycle' defense areas, like services and electronics, with the customer pre-empting a potential CR and budget cuts," RBC Capital Markets analyst Robert Stallard said in a client note.
Into the quarter, L-3 Communications (NYSE:LLL) is well positioned given little guidance risks, and it is spinning out most of its Government Services businesses into Engility this month.
Meanwhile, earnings of Boeing Co. (NYSE:BA), Lockheed Martin Corp. (NYSE:LMT), Raytheon Co. (NYSE:RTN), BE Aerospace, Inc. (NASDAQ:BEAV) and Precision Castparts Corp. (NYSE:PCP) are expected to beat consensus. On the other hand, General Dynamics Corp. (NYSE:GD), Alliant Techsystems Inc. (NYSE:ATK) and Rockwell Collins, Inc.(NYSE:COL) earnings may miss Street view.
Following is a brief write-up of some of the key companies reporting results next week:
Boeing, which reports on July 25, should report a better-than-expected quarterly results, driven by a better Commercial deliveries/mix. The company may also raise its full-year outlook. Investors would be focusing on the progress of 787 production ramp, and whether the recent US legislation has materially affected the planned cash contributions to the pension. Wall Street expects Boeing to earn $1.10 a share on revenue of $19.35 billion, according to analysts polled by Thomson Reuters.
Lockheed Martin is set to report on July 24 and is expected to earn $1.91 a share on revenue of $11.29 billion. The company will likely highlight its commitment to maintain its leading dividend payout strategy and the company may share some details on the pension cash funding relief from the recent transportation bill.
"We expect Lockheed Martins' earnings to be helped by continued cost control and share buybacks during the quarter," Stallard noted.
Northrop Grumman Corp.'s (NYSE:NOC) earnings are expected to track ahead of consensus likely on better margin execution. The company, which would report on July 25, is expected to earn $1.61 a share on revenue of $6.18 billion.
"We expect positive margin performance (as seen in the last several quarters) coupled with share repo to drive the EPS ahead of the street on the back of an inline to slightly better top-line," Walton said.
Raytheon would announce second quarter results on July 26, and its earnings may come in above Street view, which calls for earnings of $1.22 a share on revenue of $6.04 billion. Investors would focus on the international bookings, capital deployment over pension funds and sequestration.
General Dynamics defense revenues to be under pressure, but would be offset with cost controls and ongoing share buybacks. On the Aerospace front, investors should be looking at how new order demand has progressed, and G650 ramp up. The company is expected to earn $1.74 a share on revenue of $7.93 billion when it reports results on July 25.