Budget tailwind for defense stocks could drive more gains
The bull run in defense stocks is expected to continue, despite lingering concerns about federal spending.
Earnings season has been a positive for some big names, including United Technologies and General Dynamics, and analysts look forward to reports from Boeing, Northrop Grumman and Raytheon in the coming week.
Even though earnings disappointed, Lockheed Martin gave overall confidence a boost Thursday when Chief Financial Officer Bruce Tanner said he was hopeful that 2014 would mark a trough in defense spending and that it would increase in future budgets.
The maker of F-35 jets forecast higher profits this year, with recent budget agreements creating what's being viewed as a more stable path.
With the threat of sequestration, or automatic spending cuts, subdued by Congress' budget agreement, many Wall Street analysts are also optimistic on the profit outlook for defense contractors in 2014.
Oppenheimer said this week that earnings season should be generally positive for the bigger cap defense companies. Despite lower defense spending as a result of sequester cuts and an end to war outlays, the firm's analysts said "primes may project a budding confidence that the bottom of this budget cycle is finally coming into view."
Goldman Sachs echoed the optimism in a Jan. 9 report, saying "official 2014 outlooks could surprise positively given the recent budget deal, margins and cash deployment."
That cash story helped propel General Dynamics stock up more than 5 percent Wednesday after it reported fourth-quarter earnings. The creator of Gulfstream business jets and Navy warships beat expectations with revenue of $8.1 billion and $1.76 earnings per share. Analysts had looked for revenue of $7.99 billion and $1.75 EPS.
The company also pledged a major share buyback in the first quarter.
(Read more: General Dynamics posts 4Q profit)
"It is our intention to make up for last year in the first quarter," General Dynamics CEO Phebe Novakovic said on the company's earnings call. "With that in mind, we are establishing imminently an accelerated share repurchase program of 11.4 million shares, the remainder of our current authorization."
United Technologies also reported Wednesday, topping profit estimates but missing on revenue. It reported revenue of $16.76 billion, about $300 million short of the Street's expectations. The results sent UTX shares about 1 percent higher on the day.
Sterne Agee reiterated its buy rating on the stock, citing "better momentum for organic growth."
But some analysts say the defense industry as a whole has seen its bull.
"I think defense stocks have had their run," Douglas C. Lane's Sarat Sethi said. "A lot of going forward is going to be cutting costs and trying to prune their balance sheets. In our view ... you take your money off the table and go after companies that can grow. So the industry as a whole is going to have a hard time growing since they've had such a good run and demand has been picking up in the last couple of years."
Aerospace giant Boeing reports Wednesday. Reporting Thursday are drone and stealth bomber maker Northrop Grumman and Tomahawk cruise missile producer Raytheon.
Beyond the headline profit and sales numbers, analysts will be paying close attention to any commentary about the business outlook and especially the future role of international growth.