U.S. defense shares up as arms makers boost profit, margins | Reuters


(Reuters) – Shares of U.S. weapons makers rose broadly on Wednesday after a spate of third-quarter results showed continued growth in earnings and operating margins despite weaker revenue.

Tensions and violence around the world were also fueling hopes among investors that Congress will ease mandatory budget cuts that are due to resume in 2016, analysts said.

General Dynamics Corp (GD.N) shares were up 3 percent at $127.60 in early afternoon after the maker of tanks, ships and business jets reported that quarterly net profit rose 6.4 percent to $694 million, or $2.05 per share, and raised its earnings forecast by 25 cents a share.

Chief Executive Phebe Novakovic said the company had raised guidance due to a modest increase in revenue, the expectation of higher operating earnings in three of the company’s four divisions and a modestly lower tax rate.

Shares of Northrop Grumman Corp (NOC.N), which builds unmanned planes and other defense electronics, were down 0.3 percent at $125.76 after rising as much as 2 percent earlier in the session. The company reported higher-than-expected profit and raised its earnings outlook despite a drop in revenue.

Northrop posted a 5 percent drop in net earnings to $473 million, or $2.26 per share, from $497 million, or $2.14 a share a year earlier, with the number of outstanding shares down 10 percent.

Lockheed Martin Corp (LMT.N), the Pentagon’s No. 1 supplier, on Tuesday reported higher earnings and lower-than-expected quarterly revenue. Its shares were trading 2 percent higher at $176.00 on Wednesday after falling as much as 5 percent on Tuesday.

Boeing Co (BA.N) shares bucked the trend, trading 3.3 percent lower at $122.98 amid concerns about rising costs on the 787 Dreamliner. The company posted an 18 percent jump in quarterly profit, helped by improved profitability in its defense sector, and raised its full-year earnings forecast.

The Dow Jones U.S. Defense Index Industrials .DJUSDN was up 1.2 percent on Wednesday afternoon, even as the broad S&P 500 Index .SPX was 0.2 percent lower.

“Pentagon demand is soft, but profits are very strong,” said Loren Thompson with the Virginia-based Lexington Institute.

“Each of the companies has demonstrated an ability to generate strong profits even with the congressional budget caps, and now the growth of foreign threats is raising the possibility of relief from those caps.”

Russia’s annexation of Ukraine’s Crimea region earlier this year, and rapid growth in Islamic State extremist groups have triggered growing concern about defense spending among NATO countries, and are helping to support the overall defense sector, analysts said.

Raytheon Co (RTN.N), the other major U.S. weapons maker, is due to report results on Thursday.

Scott Thompson of PriceWaterhouseCoopers said rising tension and violence were seen as increasingly likely to trigger moves by U.S. lawmakers to ease, if not lift, automatic spending cuts at a key time when most defense companies were nearing the end of their ability to reduce overhead costs.

“With everything going on in the Middle East, I would find it surprising if the full effect of sequestration were allowed to happen,” he said.

(Editing by Matthew Lewis)

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