Defence companies Raytheon Co and L-3 Communications Holdings posted higher-than-expected quarterly profits on Thursday and offered optimistic outlooks, but talk of a shaky economic and political landscape hit the shares.
“We have an economy, not only domestically but internationally, that is equivalent to one of the biggest recessions in history,” Raytheon Chief Executive William Swanson said on a conference call with analysts and reporters.
“I don’t think I have gone through one of these in my last 39 years like this,” he said, noting additional uncertainty surrounding the November U.S. midterm congressional elections, which could change the balance of power in government and affect defence spending.
Raytheon’s shares fell 4.33 percent to US$45.25 on the New York Stock Exchange and L-3 shares were down 1.24 percent at US$70.25. The S&P aerospace index .GSPAERO was up 0.16 percent.
Sales were little changed for both companies, which said they expect 2011 to outpace 2010. But Swanson’s cautionary language hit the shares, said Brian Ruttenbur, an analyst at Morgan Keegan.
“After the elections everything is going to firm up,” he said. “Everybody is concerned that there’s going to be budget cuts. And how much is going to be hit on defence?”
Tougher times are in store of US defence companies, given mounting budget pressures in the United States and Europe and expected rises in pension expenses tied to lower interest rates, experts said. Last week, Britain announced sweeping defence cuts.
Defence contractors General Dynamics Corp and Northrop Grumman Corp posted higher quarterly earnings and raised their profit views on Wednesday
But industry leader Lockheed Martin Corp said last week that third-quarter earnings fell, and warned that contract delays and cancellations could hurt results next year.
“Defence companies, despite slightly softer top-line revenues, continue to harvest gains on the operating level from very mature production runs,” said Gleacher & Co analyst Peter Arment.
“There has been some caution around 2011, not only for defence volumes, but also pension headwinds,” Arment said.
RAYTHEON, L-3 NUMBERS
Raytheon, which makes missiles and radar systems, reported a third-quarter profit of $728 million, or US$1.94 a diluted share, up from US$490 million, or US$1.25 a share, a year earlier.
Excluding one-time items, Raytheon said earnings were US$1.36 per share. Analysts expected US$1.13, according to Thomson Reuters I/B/E/S.
Quarterly net sales rose 1.6 percent to $6.3 billion.
Raytheon’s Swanson said in a statement that cost reductions played a big role in the third-quarter profit.
The company said it expected earnings of US$4.45 to US$4.55 a share from continuing operations for this year. It previously forecast US$4.00 to US$4.15 a share.
Raytheon said it would take a charge of 13 cents per share in the fourth quarter for the make-whole provision on retired debt. The company said it would issue a detailed 2011 forecast when it reports fourth-quarter results in January.
“If we have to peg next year today, we are looking at a sales range of 2 percent to 4 percent over 2010,” Raytheon Chief Financial Officer David Wajsgras said on a conference call with analysts and reporters.
L-3, which makes explosive-detection devices and aviation products, said third-quarter net income fell to US$238 million, or US$2.07 a share, from US$250 million, or US$2.12 a share, a year earlier. Analysts had expected $2.02 a share.
The latest results included a debt retirement charge of 3 cents per share, while the year-earlier profit included a tax benefit of 22 cents per share.
Sales were little changed from a year ago at $3.84 billion. L-3 said lower sales in the Aircraft Modernization and Maintenance and Electronic Systems segments had offset growth in the Command, Control, Communications, Intelligence, Surveillance and Reconnaissance segment.
L-3 forecast 2011 net sales of US$15.7 billion to US$15.9 billion, compared with US$15.6 billion to US$15.7 billion expected for 2010.