Despite missing Wall Street’s top and bottom-line third-quarter estimates and delivering a weak outlook this week, Northrop Grumman Corp.’s stock continues to live up to its ‘teflon’ reputation.
As expected, Northrop Grumman’s
NOC,
stock shook off Thursday’s miss and was up 2.9% on Friday, outpacing the S&P 500 index’s
SPX,
2% gain.
“In ‘normal’ circumstances, a defense stock missing quarterly EPS, guiding to the low end of the EPS range for the year, and then chopping ~20% off next year’s EPS forecast would see the stock price go down,” wrote Vertical Research Partners analyst Robert Stallard, in a note released on Thursday. “But not Northrop ‘Teflon’ Grumman.”
Despite the vast amount of military hardware needed in Ukraine’s ongoing war with Russia and a robust U.S defense budget, the industry is facing a host of challenges. Speaking during a conference call to discuss the third-quarter results, Northrop Grumman CEO Kathy Warden acknowledged that the defense industry is experiencing a level of macroeconomic volatility “that we haven’t seen in decades.”
Nonetheless, she said that Northrop Grumman is seeing a strong demand environment for its products.
Strong growth in Northrop Grumman’s space business offset third-quarter shortfalls in its aeronautics- and defense-systems divisions. The defense company also said that its third-quarter sales reflect improving trends in labor availability, partially offset by supply-chain delays.
Northrop arguably has the best mid-term growth prospects in the defense sector, according to Vertical Research Partners’ Stallard. However, citing the defense company’s relative valuation level, Vertical Research Partners maintained its hold rating and $473 price target for the company.
In contrast, L3Harris Technologies Inc.’s
LHX,
stock fell 1.4% on Friday after the defense company reported third-quarter results that fell short of expectations. The company also cut its full-year earnings guidance to between $5.80 and $6.05 a share, from $10.75 to $11.05 a share. L3 Harris also lowered its revenue outlook to about $16.8 billion, from about $17.3 billion to $17.7 billion.
In a letter to investors L3Harris Technologies CEO Christopher Kubasik said guidance was impacted by factors including “the timing of a Mideast aircraft missionization program” and supply disruptions.
While the company has won major awards such as $3 billion for the U.S. Special Operations Command’s Armed Overwatch program, $800 million for satellites as part of Space Development Agency’s National Defense Space Architecture and nearly $400 million for an integrated U.S. Navy sensor and fire control system, the CEO highlighted broader concerns. “In the U.S., the GFY23 [Government Fiscal Year 2023] DoD budget is showing strength; however, we began the government fiscal year with another continuing resolution, while mid-term elections are approaching and national debt is expanding,” he wrote. “The lack of budget visibility continues to strain the industry, as well as our business, and runs contrary to urgent needs.”
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On Friday Raymond James downgraded L3Harris Technologies to market perform from outperform, citing the stock’s recent outperformance, and factors affecting the company’s sales and margin performance.
L3Harris Technologies’ stock has risen 16.8% in 2022, compared with the S&P 500 index’s decline of 18.6%.
“Our long term outlook for defense spending remains favorable and while LHX has performed well its business is clearly moderating providing an appropriate time to re-allocate into defense names that are seeing an acceleration of fundamentals,” wrote Raymond James analyst Brian Gesuale. “Likewise, the timing and ramp of key awards are weighing on volumes more than we had anticipated; and labor, supply chain issues and inflation are likely to weigh on our 2023 outlook.”
Elsewhere in the sector, Raytheon Technologies Corp.’s
RTX,
stock rose 3.2% on Friday. Earlier this week the company beat its third-quarter earnings target and raised the low end of its 2022 earnings range. Shares of Lockheed Martin Corp.
LMT,
which beat third-quarter profit estimates earlier this month, rose 3.3% on Friday.
