Zacks Industry Outlook Highlights: Lockheed Martin, Huntington Ingalls Industries, L-3 Communications Holdings, Textron and

    Zacks Industry Outlook Highlights: Lockheed Martin, Huntington Ingalls
    Industries, L-3 Communications Holdings, Textron and Rockwell Collins

PR Newswire

CHICAGO, Dec. 20, 2013

CHICAGO, Dec. 20, 2013 /PRNewswire/ --Today, Zacks Equity Research discusses
the U.S. Aerospace and Defense, including Lockheed Martin Corp. (NYSE:LMT-Free
Report), Huntington Ingalls Industries Inc. (NYSE:HII-Free Report), L-3
Communications Holdings Inc. (NYSE:LLL-Free Report), Textron Inc.
(NYSE:TXT-Free Report) and Rockwell Collins Inc. (NYSE:COL-Free Report).


Industry: Aerospace and Defense


The aerospace and defense industry found its largest base in the U.S. with a
fittingly impressive military budget. The U.S.'s global leadership position
requires it to maintain the capacity to respond to the ever-changing national
security environment.

Sequestration and spending cuts were expected to adversely affect the
performances of the defense behemoths that explicitly provide products and
services to the U.S. Department of Defense. In reality, the defense players
are doing well despite the fear of Damocles' sword hanging over defense
budgets and big-ticket programs.

Budget Issues - the Sequester

In Apr 2013, the Obama administration proposed a defense budget of $526.6
billion for FY14, down $0.9 billion from the FY13 annualized continuing
resolution level of $527.5 billion.

Again in May, an amendment to the FY2014 President's budget was issued that
included $80.7 billion (excluding prior-year cancellations) for Overseas
Contingency Operations (OCO), which is essentially government-speak for
foreign wars and war on terror operations.

On Dec 10, 2013, the House and Senate negotiators have reached a two-year
budget agreement, mitigating about half the sequester cuts expected to gouge
the defense budget in fiscal year 2014. Upon successful approval from both the
House and Senate, any near-term government shutdown will be averted.

The budget sequester that went into effect at the start of Mar 2013 and that
has a direct bearing on the U.S. government's defense spending is a function
of the country's fiscal and economic challenges. These cuts will not spare any
of the defense majors from Lockheed Martin Corp. (NYSE:LMT-Free Report) to
Huntington Ingalls Industries Inc. (NYSE:HII-Free Report).

Offsetting the Sequestration Effect

Sequestration will cut some $1 trillion from the defense budget over the next
decade, according to The Washington Free Beacon. Yet, the aerospace and
defense industry is holding up well this year thanks to technological
innovations, big contracts, acquisitions and growing commercial demand.

Since the domestic aerospace and defense sector is facing budget cuts and a
constrained spending environment, the industry is looking for growth from
international orders. Additionally, a number of new emerging markets as well
as developed nations such as India, Japan, the United Arab Emirates, Saudi
Arabia and Brazil are boosting defense spending and generating business for
the U.S. aerospace and defense companies.

Moreover, these defense behemoths have diversified their businesses to counter
the effect of the sequester. Also, the complex military programs being awarded
to these companies much before the across-the-board spending cuts came into
force have somewhat diluted the sequester impact.

Zacks Industry Rank

The Zacks Industry Rank relies on the same estimate revisions methodology that
drives the Zacks Rank for stocks. The way to look at the complete list of 258+
industries is that the outlook for industries with Zacks Industry Rank of #88
and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher
is 'Negative.' Zacks Industry Rank for the Aerospace industry is at #170 out
of 258 industries, which puts it in the Neutral zone.

Earnings Review and Outlook

The third-quarter earnings season has been a testament to the bullish trend in
the defense sphere, defying sequestration and budget cut woes. The earnings
results of all the defense companies in our universe, except two surpassed the
Zacks Consensus Estimate.

The highest positive surprise of 37 cents came from Huntington Ingalls while
the lowest surprise of 2 cents was clocked by L-3 Communications Holdings Inc.
(NYSE:LLL-Free Report). On the contrary, Textron Inc. (NYSE:TXT-Free Report)
and Rockwell Collins Inc. (NYSE:COL-Free Report) missed the Zacks Consensus
Estimate by 25.53% and 2.29%, respectively.

As of Nov 22, 2013, the aerospace sector's top and bottom line beat ratio was
62.5% and 75%, respectively as compared to 42.1% and 65.4%, respectively, for
the S&P 500.

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