Defense Duo: Raytheon and Northrop Grumman

Focus: INDUSTRIALS

Stephen Leeb Image Stephen Leeb Founder and Research Chairman, Leeb Group

Sales grew 4.2 percent to $6.3 billion and (adjusted) EPS was $1.96. The $1.96 represents a decline from the $2.38 mark from the year-ago quarter, but the 2016 second-quarter figure included a $0.53 tax-free gain from a joint-venture restructure.

Raytheon raised its net-sales guidance from $24.9-$25.4 billion to $25.1-$25.6 billion and EPS guidance from $7.25-$7.40 to $7.35-$7.50. At the midpoint, that’s a 0.8 percent and 1.4 percent increase, respectively.

Besides similar beat-and-raise quarters, both defense standouts also won several additional significant contracts during the quarter; Raytheon was reaffirmed as the prime contractor and system integrator for the Department of Homeland Security’s Development, Operations, and Maintenance program.

The company will help to protect the networks of more than 100 federal government agencies, a confirmation of Raytheon’s cyber-security capabilities, a major reason we like the company.

The first half of 2017 was kind to both defense stalwarts. The largest risk at this time appears to be possible Washington gridlock. Since the U.S. government is a major customer for both Northrop and Raytheon, political impasse or turmoil could delay or reduce business for defense contractors.

In this respect, we like Raytheon better because it has more overseas clients (about 32 percent of revenues is from overseas customers; for Northrop, it’s 13 percent).

It has reported particular demand strength from the Asia-Pacific region where North Korea’s nuclear threats and China’s ambitions in the surrounding waters have compelled U.S. allies to beef up their defenses. Both stocks remain our top picks among dedicated defense companies.

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