U.S. defense firms raise profit forecast in tight spending backdrop

Wed Jul 23, 2014 2:00pm EDT

A representative from General Dynamics describes the benefits of their Next Generation Fire Control System to a military representative from Uganda inside the exhibit hall at the Special Operations Forces Industry Conference in Tampa, Florida, May 21, 2014.  REUTERS/Brian Blanco

A representative from General Dynamics describes the benefits of their Next Generation Fire Control System to a military representative from Uganda inside the exhibit hall at the Special Operations Forces Industry Conference in Tampa, Florida, May 21, 2014.

Credit: Reuters/Brian Blanco

(Reuters) - U.S. weapons makers General Dynamics Corp (GD.N) and Northrop Grumman Corp (NOC.N) raised their 2014 profit forecasts as cost cutting allowed them to improve profitability even as defense spending by the U.S. government remained low.

The companies, which reported better-than-expected second-quarter profits on Wednesday, have kept a tight lid on operational costs to overcome the effect of U.S. budget cuts.

They have also held their stock prices up by returning cash to shareholders through share buybacks and strong dividends.

General Dynamics, maker of Gulfstream jets, tanks and U.S. Navy ships, said on Wednesday it expected to repurchase shares in the second half of 2014. The company has spent about $2.7 billion on share buybacks so far this year.

"Such results will continue to build (General Dynamics') investors' confidence in the CEO's focus on profitability and cash deployment," RBC Capital Markets' Robert Stallard wrote in a note.

The company raised its forecast for full-year earnings to $7.40-$7.45 per share from $7.05-$7.10.

General Dynamics said its total potential contract value, the sum of all backlog, rose 29 percent to $99.5 billion in the second quarter ended June 29 - its highest in the past four years.

"Overall defense spending is still sluggish given U.S. budget concerns, but General Dynamics' defense units are looking like they'll do better this year than was initially expected," Christian Mayes, an analyst at Edward Jones Equity Research, told Reuters.

General Dynamics reported an increase in orders in its marine systems division - which sells to the U.S Navy - suggesting that the government spending on defense may be stabilizing.

However, smaller rival Northrop was not as optimistic.

"While we are encouraged by the tone of fiscal year 2015 budget negotiations, we remain cautious regarding the longer term," Northrop Chief Executive Wes Bush said on a conference call with analysts.

The company, which makes unmanned aircraft, the B-2 bomber and electronic equipment, raised its 2014 earnings forecast to $9.15-$9.35 per share from $8.90-$9.15.

Northrop said its profit was boosted by a lower pension liability - the result of higher interest rates that changed the discount rate used to calculate the company's pension liabilities.

Lockheed Martin Corp (LMT.N), the Pentagon's largest defense supplier, also reported a better-than-expected 3.5 percent rise in quarterly profit on Tuesday and said it planned to resume share repurchases in the current quarter. [ID:nL4N0PX4GC]

General Dynamics' operating costs and expenses fell 5 percent to $6.53 billion, while Northrop's costs fell 6 percent in the second quarter.

Falls Church, Virginia-based General Dynamics' net income fell 15.5 percent to $541 million. Excluding a charge of $105 million, income from continuing operations rose 1 percent to $646 million, or $1.88 per share.

Analysts on average expected earnings of $1.77 per share, according to Thomson Reuters I/B/E/S.

The company's shares were up about 1.3 percent at $120.07 in afternoon trading on the New York Stock Exchange. Northrop's shares were nearly flat at $126.59.

(Additional reporting by Rohit T.K. in Bangalore; Editing by Don Sebastian and Saumyadeb Chakrabarty)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.