Cost cuts and bigger margins helped General Dynamics and Northrop Grumman deliver stronger-than-expected quarterly profits as U.S. budget issues hampered sales.
Tighter global defense budgets are expected to challenge contractors, which are shedding nonstrategic operations and looking to buy higher-growth technologies.
Earlier this month, U.S. President Barack Obama called for shaving US$400 billion from U.S. security-related spending from fiscal 2013 through 2023 as part of deficit-reduction moves.
“The trouble for the defense stocks has got more to do with the direction of the defense budget because of pressures from federal spending than with who is in charge at this point,” said Morningstar analyst Anil Daka. “We think that the top lines are not going to go particularly well.”
Standard & Poor’s Equity downgraded General Dynamics to “hold” from “buy” on Wednesday, saying weaker defense budgets at home and abroad will weigh.
Boeing also topped Wall Street profit estimates despite flat sales in its defense unit. The company is benefiting from a recovery in commercial aerospace.
General Dynamics, whose products include tanks, ships and Gulfstream jets, told analysts that defense orders were “somewhat light” in the first quarter, partly reflecting delays in U.S. defense appropriations legislation.
“With its recent passage, we expect healthier order activity in the coming weeks and months,” Chief Executive Jay Johnson said on a conference call.
Northrop, which last month spun off its ship business, also said U.S. budget funding affected first-quarter sales, which fell 3 percent to US$6.73 billion. Northrop raised its full-year profit forecast.
Net earnings at General Dynamics were US$618 million, or US$1.64 a share, for the quarter, ahead of analysts’ average estimates of US$1.61 per share, according to Thomson Reuters I/B/E/S. Revenue rose less than 1 percent to nearly US$7.8 billion.
Operating profit rose at General Dynamics’ aerospace, combat systems and marine systems divisions but declined in information systems.
At Northrop Grumman, which supplies unmanned spy planes and does ballistic missile defense work, net income came to US$530 million, or US$1.79 a share. On a continuing basis, profit was US$1.67 per share, topping analysts’ average estimate of US$1.56.
Northrop said pension adjustment produced income of US$103 million in the latest quarter, up from US$2 million a year earlier. It said lower corporate expenses also aided profit.