Earnings Outlook

With defense contractors set to announce their second-quarter earnings later on this month, Wall Street investment firm Credit Suisse this morning released its own outlook for the defense and aerospace industry. Some excerpts:

*      Q2 earnings looks safe; but tone will be key: Despite mixed economic data and deteriorating broad market sentiment, Aerospace & Defense results generally should meet or beat expectations given the longer, later cycle nature of the sector.  Thus, we do not expect many negative surprises, with the exception of a possible guidance downgrade from COL. But, we think stocks will react to tone from management, particularly from defense contractors turning up the volume on the risks from sequestration. . . .

*      Sequestration overhang in defense:  EPS should meet expectations, likely with high margins once again offsetting soft sales.  But stocks will generally be held back by light bookings as acquisition officials stall new contracts in the face of uncertainty, especially in O&M accounts.  Lastly, we expect a rise in the rhetoric on the mounting threat to industrial stability and jobs.

*      Stocks: Into results we prefer BA and PCP in comm'l OE. In aftermarket, we favor TDG, although its recent resiliency (+39% YTD) could limit share upside from earnings. In Defense, we favor RTN (OP) on int'l and electronics long-term, but note LMT's & NOC's higher relative Air Force and lower Army exposure should benefit their order intake in Q2.