Defense Contractors See Bright Spots Amid Spending Cuts - TheStreet

Defense Contractors See Bright Spots Amid Spending Cuts

Raytheon, Lockheed Martin, Rockwell Collins and L-3 Communications report earnings Thursday amid anticipated declines in U.S. defense spending.
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CHARLOTTE, N.C. (

TheStreet

) -- Four major defense contractors report earnings Thursday against a backdrop of anticipated declines in defense spending as the U.S. government confronts its various fiscal problems.

Nevertheless, some signs are positive. Analysts surveyed by Thomson Reuters estimate earnings of $1.23 a share at

Raytheon

(RTN) - Get Report

, up 21% from a year earlier.

Also reporting are

Lockheed Martin

(LMT) - Get Report

,

Rockwell Collins

(COL)

and

L-3 Communications

(LLL) - Get Report

.

Broadpoint Amtech analyst Peter Arment says he expects both Raytheon and Lockheed-Martin will report "solid quarters" and offer favorable outlooks. One factor, he said, is that improved discount rates will result in lower pension funding requirements, which would help future earnings. Analysts estimate that Lockheed will earn $1.99, down 3%.

Goldman Sachs analyst Noah Poponak says he expects Raytheon to beat estimates and provide a favorable outlook "more driven by operations than pension relief, highlighting Raytheon's ability to outgrow its peers in a tough budget environment," according to a recent report.

Poponak has soured on Lockheed, which he has added to his sell and conviction sell lists, because of its broad exposure to reduced defense spending and because he expects the joint strike fighter program to produce negative surprises this year. However, Wells Fargo analyst Sam Pearlstein expects Lockheed to "modestly raise" 2010 guidance, due to an improved pension plan outlook including higher discount rate assumption.

Standard and Poor's analyst Richard Tortoriello has a buy rating on Rockwell Collins with a target price of $56. He projects a 4% increase in sales during the current fiscal year, a result of increased aftermarket demand as well as improved sales of aircraft display and control systems and defense communications systems. Analyst Alex Hamilton of Jesup & Lamont also has a buy rating on Rockwell, along with a $59 target price.

Rockwell Collins closed Monday at $53.08, down 15 cents. Analysts estimate earnings of 73 cents, down 23%.

Tortoriello has a hold on L-3 Communications. He anticipates 2010 revenue growth of about 3% in the current year, slightly lower than the 2009 rate of 3.2%, and EPS growth of 6% to $8. "Although we think L-3's mix of defense electronics and specialized military products and government service are well-matched with current military priorities, we see a pullout of U.S. troops from Iraq," he said. "(but) our overall expectations of no real growth in the U.S. defense budget going forward (will prevent) the shares from outperforming."

Analysts estimate L-3 earnings of $1.86, down 16%. Analyst Brian W. Ruttenbur of Morgan Keegan rates the company outperform, saying it is well positioned regarding Defense Department priorities and should grow faster than the industry average. "We also see potential upside from the company's security business in 2010 as spending on screening equipment such as whole body imagers accelerates," he said in a recent report.

In general, defense shares remain hostage to the federal budget. "Our view remains that budget pressure is unlikely to ease, and could actually increase, leading to further cuts and delays to equipment programs to stay within the more stringent budgetary constraints that all federal spending departments now face," wrote Macquarie Securities analyst Rob Stallard, in a recent report. "Over time, we see sales slowing towards the (defense department) budget growth rates.

"We're not expecting any surprises in defense earnings for this quarter," Stallard added. "Companies may be able to modestly increase 2010 EPS guidance, particularly if pension returns have come in slightly better than expected."

Stallard said he remains positive on commercial aerospace, as the airline industry recovers, and underweighted on defense. In defense, "valuations remain subdued," he said. "However, given sector rotation and a challenging budget backdrop, we doubt whether defense stocks will move that much from current levels."

Late Monday morning, stock in Lockheed traded at $76.50, down 69 cents. Shares in L-3 traded at $84.71, down 65 cents. Shares in Raytheon traded at $53.01, down 11 cents.

-- Written by Ted Reed in Charlotte, N.C.

.