The end of the earnings season is always a good time to take a step back and see who shined (and who not so much). Let’s take a look at how defense contractors stocks fared in Q2, starting with Mercury Systems (NASDAQ:MRCY).
Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.
The 15 defense contractors stocks we track reported a very strong Q2. As a group, revenues beat analysts’ consensus estimates by 4.7% while next quarter’s revenue guidance was 6.7% below.
Big picture, the Federal Reserve has a dual mandate of inflation and employment. The former had been running hot throughout 2021 and 2022 but cooled towards the central bank's 2% target as of late. This prompted the Fed to cut its policy rate by 50bps (half a percent) in September 2024. Given recent employment data that suggests the US economy could be wobbling, the markets will be assessing whether this rate and future cuts (the Fed signaled more to come in 2024 and 2025) are the right moves at the right time or whether they're too little, too late for a macro that has already cooled.
Luckily, defense contractors stocks have performed well with share prices up 16% on average since the latest earnings results.
Mercury Systems (NASDAQ:MRCY)
Founded in 1981, Mercury Systems (NASDAQ:MRCY) specializes in providing processing subsystems and components for primarily defense applications.
Mercury Systems reported revenues of $248.6 million, down 1.8% year on year. This print exceeded analysts’ expectations by 7.8%. Overall, it was an incredible quarter for the company with an impressive beat of analysts’ organic revenue and earnings estimates.
“In fiscal 2024, we made considerable progress in addressing what we believe to be transient challenges in the business, and we enter fiscal 2025 confident in our strategic positioning as a leader in mission-critical processing at the edge and our ability to deliver predictable organic growth with expanding margins and robust free cash flow,” said Bill Ballhaus, Mercury’s Chairman and CEO.
Mercury Systems Total Revenue
Mercury Systems delivered the slowest revenue growth of the whole group. Interestingly, the stock is up 2% since reporting and currently trades at $34.69.
Developing submarine detection systems for the U.S. Navy, Leonardo DRS (NASDAQ:DRS) is a provider of defense systems, electronics, and military support services.
Leonardo DRS reported revenues of $753 million, up 19.9% year on year, outperforming analysts’ expectations by 10.7%. The business had an incredible quarter with an impressive beat of analysts’ earnings estimates.
Leonardo DRS Total Revenue
Leonardo DRS achieved the biggest analyst estimates beat among its peers. The market seems content with the results as the stock is up 4% since reporting. It currently trades at $29.33.
Creator of the famous M1 Abrahms tank, General Dynamics (NYSE:GD) develops aerospace, marine systems, combat systems, and information technology products.
General Dynamics reported revenues of $11.98 billion, up 18% year on year, exceeding analysts’ expectations by 4.1%. Still, it was a slower quarter as it posted a miss of analysts’ backlog sales estimates.
Interestingly, the stock is up 4.5% since the results and currently trades at $307.80.
Established with a commitment to supporting national security, Kratos (NASDAQ:KTOS) is a provider of advanced engineering, technology, and security solutions tailored for critical national security applications.
Kratos reported revenues of $300.1 million, up 16.8% year on year. This print surpassed analysts’ expectations by 8.7%. Overall, it was an exceptional quarter as it also logged an impressive beat of analysts’ organic revenue and earnings estimates.
The stock is up 26.8% since reporting and currently trades at $25.50.
Originally focused on refrigeration technology, Raytheon (NSYE:RTX) provides a a variety of products and services to the aerospace and defense industries.
RTX reported revenues of $19.72 billion, up 7.7% year on year. This number surpassed analysts’ expectations by 2.3%. It was an exceptional quarter as it also put up an impressive beat of analysts’ organic revenue estimates.
RTX pulled off the highest full-year guidance raise among its peers. The stock is up 20.5% since reporting and currently trades at $126.40.
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