Defence companies’ profits beat Street view

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Three big defence contractors beat Wall Street earnings expectations, aided by higher sales, and said cost-cutting would aid 2011 as military spending comes under pressure.

Industry leader Lockheed Martin forecast 2011 profit above analysts’ estimates on Thursday, and L-3 Communications Holdings boosted its full-year outlook. Raytheon Co forecast higher earnings for the year.

Defence contractors have been overshadowed by concern that earnings growth will be hard to achieve as governments eye spending cuts in a bid to reduce deficits. The sector saw steady increases following the September 11, 2001, attacks as US defence spending ramped up, Reuters reports.

Earlier this month, the US Defence Department said it would cut US$78 billion in spending over five years.

To cope, defense companies have reduced staff, put non-core divisions up for sale and are looking to acquire companies with niche technologies that are in demand.

The companies “are kind of between a rock and a hard place,” said Morningstar analyst Anil Daka. “The Department of Defense is almost certainly going to squeeze the contractors to get more out of less.”

KEEPING COSTS DOWN

Raytheon, which is planning to buy cybersecurity company Applied Signal Technology Inc, said its focus on cost controls would continue into 2011, and L-3 told a conference call that it would continue to study acquisition candidates and expects to shed non-core businesses.

Lockheed’s finance chief said in an interview that divestitures and big acquisitions were not likely in his company’s plans for this year.

Lockheed, which put two businesses up for sale last year, is working to fix problems with its F-35 Joint Strike Fighter, the Pentagon’s costliest weapons program.
“We’ll continue to seize opportunities to reduce costs, increase productivity and drive affordability throughout the company,” Lockheed Chief Executive Robert Stevens told analysts on a conference call.

Shares of Lockheed rose 0.9 percent to close at US$79.10, and L-3 gained 1.4 percent to $78.40. Raytheon fell 0.9 percent to US$51.14. The S&P Aerospace index .GSPAERO gained 0.8 percent.

Lockheed, the world’s biggest defense contractor, said quarterly profit from continuing operations came to US$2.30 a share. Analysts expected US$2.11. Sales rose about 5 percent to US$12.79 billion.

Missile maker Raytheon reported fourth-quarter earnings, adjusted for one-time items, of $1.47 a share, well above analysts’ average forecast of US$1.16, according to Thomson Reuters I/B/E/S. Sales rose 3 percent to $6.89 billion.



L-3, which makes explosive-detection and aviation products, posted an 18 percent jump in quarterly profit. Net sales increased 1 percent to US$4.3 billion.