The United Kingdom's vote to leave the European Union compelled Wall Street to digest its ”worst day in 10 months” on Jun 24, as the ripple effect was also felt across the Atlantic as well as in the global stock markets. The Brexit referendum took the markets by surprise and triggered a "sell first" attitude nearly across the board.

The S&P 500 Aerospace & Defense (Industry) index and Dow Jones U.S. Aerospace & Defense Index dropped 4.14% and 4.23%, respectively, in the last five trading sessions. Both the indexes dropped by more than 4% in the last two trading sessions alone. Boeing (BA Quick QuoteBA - Free Report) suffered the greatest impact with its stock plunging more than 8% in the last two days. This may be because of its substantial commercial aerospace exposure. A high level of market volatility, however, led most defense stocks to trade in the red over the past five sessions.

Defense companies have nevertheless scooped up a number of Pentagon contracts in the past one week including those involving Foreign Military Sales (“FMS).

An Aerojet Rocketdyne unit announced yesterday that it expects to save $8 million annually by consolidating its six business units into two.

(Read Defense Stock Roundup for Jun 14, 2016 here.)

Sector Price Index

Sector Price Index

Recap of the Week’s Most Important Stories

1.    Pentagon’s No. 1 contractor, Lockheed Martin, has bagged a contract from the U.S. Army for work on Sensor Systems – Aerial Intelligence, Surveillance and Reconnaissance (“SS-AISR”). With an initial term of one year, the contract offers two one-year options and has been valued at $733 million.

Per the contract, Lockheed will provide support services to the Army Contracting Command's Aberdeen Proving Ground for upgrading sensor equipment and platforms to support the collection of data for AISR, air- and ground-based processing, utilization and propagation for missions around the globe.

Again, Lockheed Martin has secured a U.S. Navy contract for support services of the Advanced Electronic Guidance and Instrumentation System (AEGIS) program. This is a cost-plus-fixed-fee contract that covers in-service combat systems engineering, computer program maintenance, annual inspection, regular overhaul execution support, in-country support and staging. This contract has a base value of $357 million and includes options which, if exercised, would bring the total contract value to $421 million.

This contract involves FMS to support the naval forces of Japan, South Korea, Norway, Australia and Spain through AEGIS implementation studies for future FMS shipbuilding programs.

2.    Raytheon Company has won an FMS contract worth $523.4 million from the U.S. Army to upgrade six PATRIOT fire units. The contract covers FMS to Kuwait. Contracting activity is the Army Contracting Command, Redstone Arsenal, AL.

Patriot is a long-range, high-altitude, all-weather system designed to counter threats from tactical ballistic missiles, cruise missiles and advanced fighter aircraft. This missile defense system was successfully used during the 1991 Gulf War and Iraqi War.

3.    Falls Church, VA-based Northrop Grumman Corp.’s (NOC Quick QuoteNOC - Free Report) Aerospace Systems unit has been awarded a modification contract from the U.S. Air Force to provide logistic and sustainment services for the Global Hawk program.

The contract is valued at $203.6 million and contracting activity is the Air Force Life Cycle Management Center, Robins Air Force Base, GA.

Global Hawk is an unmanned aircraft intelligence, surveillance and reconnaissance system capable of flying high altitudes and long hours.

4.    An Aerojet Rocketdyne Holdings, Inc. unit, Aerojet Rocketdyne, Inc., has consolidated its six business units into two: Space and Defense. The company expects to save $8 million annually by “flatten[ing] the layers of top level management.” This move is another vital step in its strategic initiatives to boost the efficiency of Aerojet Rocketdyne and improve the company’s competitive stance.

Aerojet Rocketdyne said that it has realized almost $100 million in cost savings since the Pratt & Whitney Rocketdyne acquisition in Jun 2013. Again, the company announced last week that it intends to save up to $20 million per year by refinancing its debt.  

The company's competitive improvement program is on target to save an estimated $145 million annually, beginning from fiscal 2019.

Performance

The defense sector was not immune to Brexit induced volatility last week. Though Lockheed Martin and Raytheon were exceptions, they displayed weak gains of less than 1%. Textron Inc. (TXT Quick QuoteTXT - Free Report) lost the most followed by Boeing.

The past six months have a mix of gains and losses. L-3 Communications Holdings was in the leading position while Textron was the biggest loser.

The following table shows the price movement of the major defense players over the past five trading days and during the last six months.

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