Wrapping up Q2 earnings, we look at the numbers and key takeaways for the defense contractors stocks, including Leonardo DRS (NASDAQ:DRS) and its peers.
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 13.8% on average since the latest earnings results.
Leonardo DRS (NASDAQ:DRS)
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. This print exceeded analysts’ expectations by 10.7%. Overall, it was an incredible quarter for the company with an impressive beat of analysts’ earnings and operating margin estimates.
“Our strong second quarter 2024 results reflect the solid momentum evident across the business. Healthy customer demand continues to propel our bookings and backlog growth. This demand along with an improving supply chain is unlocking revenue growth above our expectations. Overall, I am pleased with our year-to-date performance, however, we are maintaining a clear focus on execution to deliver on our commitments to customers and shareholders,” said Bill Lynn, Chairman and CEO of Leonardo DRS.
Leonardo DRS Total Revenue
Leonardo DRS achieved the biggest analyst estimates beat of the whole group. Unsurprisingly, the stock is up 8.3% since reporting and currently trades at $30.52.
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, outperforming analysts’ expectations by 7.8%. The business had an incredible quarter with an impressive beat of analysts’ organic revenue and earnings estimates.
Mercury Systems Total Revenue
The market seems happy with the results as the stock is up 9.4% since reporting. It currently trades at $37.18.
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 1.2% since the results and currently trades at $297.90.
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 result beat analysts’ expectations by 8.7%. It was a very strong quarter as it also recorded an impressive beat of analysts’ organic revenue and earnings estimates.
The stock is up 23.5% since reporting and currently trades at $24.84.
Building Nimitz-class aircraft carriers used in active service, Huntington Ingalls (NYSE:HII) develops marine vessels and their mission systems and maintenance services.
Huntington Ingalls reported revenues of $2.98 billion, up 6.8% year on year. This number surpassed analysts’ expectations by 4.7%. Taking a step back, it was a satisfactory quarter as it also recorded a solid beat of analysts’ earnings estimates but a miss of analysts’ operating margin estimates.
The stock is down 8.4% since reporting and currently trades at $256.38.
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