4 Defense Stocks Poised For A Q3 Earnings Beat

The picture is a little depressing for the aerospace and defense sector as it steps into the third quarter earnings season next week.

Economic growth is expected to have suffered in the third quarter of the year as the Atlanta Fed’s real-time Q3 GDP growth estimate is currently tracking to +1.1%. Although the figure is up from the earlier forecast of 0.9%, it is quite a drop from the 3.9% growth realized in the prior quarter. Stocks have fallen sharply as the S&P 500 plunged 12% between Jul 20 and Aug 25 in the first stock market correction in four years.

Growth remained challenged for most of the quarter thanks to a strong dollar and weak energy prices. Moreover, the persistent slowdown in China deepened global economic woes. It is a sign that cracks are appearing in the economy in a year when the U.S. was reasserting itself as the global growth leader.
 
A stronger dollar could have an adverse impact on foreign military sales. Second-quarter 2015 results from United Technology (UTX – Analyst Report) showed a significant negative impact from the China weakness and a strong dollar.
 
Overall, the picture is somewhat still gloomy as the aerospace sector’s earnings are expected to decline 7.4% in the third quarter, though slightly better than Q2. The sector is expected to register top-line growth of 1% (4.6% growth in Q2) while margins are projected to move south by 0.6% (down 1.05% in Q2).
 
Mercurial Planet: a Defense Driver
 
In spite of uncertainties, the U.S. defense sector has held up well given the elevated geopolitical risk and strong commercial sales. This appears to be fueling support in Washington for an increase in fiscal 2016 defense spending above sequestration caps.
 
A politically unstable planet despite tottering economies has led to various nations stepping up their defense capabilities. The primary driver for these defense firms was the success they tasted in the ‘rest of the world’. Countries allied to U.S. policy are spending substantially on sophisticated artillery to wage the war against terror and sectarian forces. The crisis has been acutely felt with the meteoric rise of the brutal jihadist group, Islamic State of Iraq and Syria (ISIS), in the Middle East, a situation that President Obama has coined “the network of death.”
 
Capitalizing on this opportunity, the big U.S. defense operators are expanding their operations through acquisitions and collaborations, to meet the demand for rising foreign orders. Foreign sales have thus become a key revenue booster.
 
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