It was only last week that Goldman Sachs (NYSE: GS) caused havoc in the stock market (or at least lead the charge) downgrading Citigroup Inc.(NYSE: C), and General Motors (NYSE: GM) among others, but now they have started to express concern that some of the defense sector stocks may be vulnerable to the next president's ax.
It was only a few weeks ago I posted Chasing Value: General Dynamics & Raytheon: The defense does not rest and things continued to look bright until a few days later, perhaps after the GS behind the scenes warning started to have an impact on the market that the sector took a mysterious swoon -- now I know why.
If Goldman Sachs, one of the few investment houses with any credibility left, makes a move everyone else seems to want to get out of the way.
I have viewed the defense sector favorably this year and will not abandon ship because GS is getting cold feet. They have been rather negative on everything lately and I do not think the (stock) world is coming to an end.
The Bloomberg article notes that while some programs will be cut others will be added. It is all a guessing game as either presidential candidate will want to review the entirety of defense expenditures in a new administration.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of GD.
MOST NOTEWORTHY: BMC Software, Smart Modular and Entropic Comm were today's noteworthy initiations:
Stanford initiated BMC Software (NYSE: BMC) with a Buy rating and $45 target. The firm highlights the company's broad product portfolio and configuration management database leadership and thinks margin expansion should continue.
ThinkPanmure assumed Smart Modular (NASDAQ: SMOD) with an Accumulate rating and $5.50 target. The firm expects better DRAM pricing but expects SMOD to experience some headwinds with Hewlett-Packard (HPQ) losing share in the server market.
Broadpoint expects Entropic Comm (NASDAQ: ENTR) to benefit from the adoption of applications that allow video through numerous devices, especially high definition and data content. Shares were started with a Buy rating and $6 target.
Bloomberg News reports that Boeing Co. (NYSE: BA) has a whole lot of losing going on. Yesterday, Boeing suffered its fourth straight defeat in three months on a U.S. defense contract. This loss represents $41 billion in lost revenue.
Here are the four contracts:
Yesterday.Lockheed Martin (NYSE: LMT) the world's largest defense company, beat Boeing for a $1.46 billion U.S. Air Force award to build a new network of navigation satellites for military and civilian use. The Air Force said it reviewed five years of past performance for both contractors. Boeing has yet to launch a single satellite under its most recent GPS contract from April 1996, and in 2006 the company forfeited $21.4 million and replaced the program's managers after delays and cost overruns.
February 2008. EADS, parent of Airbus and Northrop Grumman (NYSE: NOC) won a $35 billion tanker contest for the Air Force. I've spilled much electronic ink on this one -- it looks like the Air Force changed the specifications for the project but only told EADS about the change.
According to an article on Bloomberg, "European defense contractors have sought work and acquisitions in the U.S., where military spending has grown faster than in their home markets. BAE Systems Plc, Europe's largest weapons maker, bought Jacksonville, Florida-based Armor Holdings Inc., the biggest maker of armor for Humvee transports, last year for more than $4.1 billion."
Now an Italian firm is bidding $5.2 billion for DRS Technologies (NYSE: DRS). According to the same article in Bloomberg, the acquiring firm, Finmeccanica, makes carbon-fiber frames for Boeing Co. (NYSE: BA)'s 300-seat 787 Dreamliner, and its AgustaWestland helicopter division has a supply contract with Lockheed Martin Corp. (NYSE: LMT) for the U.S. presidential fleet. DRS makes flight recorders, sensors and thermal-imaging devices that are used on U.S. military helicopters and ships.
Finmeccanica is partly owned by the Italian government. An acquisition like this rounds out the Italian defense supplier's product-line and positions it well to penetrate U.S. military spending. Much of the premium paid by the Italians has been realized already as the venerable Wall Street Journalreported of the possible deal last week.
Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.
According to the Wall Street Journal, former American International Group Inc (NYSE: AIG) CEO Maurice R. "Hank" Greenberg is pressing the troubled insurer to turn the company around. He says that he and other major shareholders have "deep concern about the persistent and seemingly endless destruction of value at AIG."
Hybrid Capital Second, a Morgan Stanley (NYSE: MS) investment vehicle, increased its stake in internet start-up Livedoor to 18.15% from 12.76% in March, the Financial Times reported, superseding the company's founder, Takafumi Horie.
OTHER PAPERS:
After it incurred $3.2B of bad debts in the first three months of the year, the Telegraph reported that Knight Vinke, an HSBC Holdings Plc (NYSE: HBC) shareholder, has renewed calls for the bank to shed its U.S. consumer finance business.
After hitting a one-year low of $88.86 in August, the stock hit a one-year high of $113.74 in October. LMT opened this morning at $103.99. So far today the stock has hit a low of $103.79 and a high of $108.00. As of 12:45, LMT is trading at $107.08, up $3.29 (3.1%). The chart for LMT looks bearish but improving, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $95 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just two months as long as LMT is above $95 at June expiration. Lockheed Martin would have to fall by more than 11% before we would start to lose money.
Defense contractor Lockheed Martin (NYSE: LMT) posted strong earnings this morning for its first quarter of $1.75 per share, well ahead of the $1.63 analysts had been expecting.
Looking at the quarter's revenue figures, we see a nice year-over-year jump, climbing to $9.98 billion from $9.28 billion. In addition, the company lifted its full-year earnings forecast by 10 cents to $7.15 to $7.35 per share.
The company had good earnings, and lifted full year estimates, so why is the stock falling in today's action? It could be in reaction to the fact that the company's biggest division, its jet business, showed a drop in sales in the period. During the quarter, this business fell since Lockheed is in the middle of a transition from its older fighter jets to newer models such as the F-35 and F-22.
Scientists at NASA plan to put one of the twin Mars rovers to sleep and limit the activities of the other robot to fulfill a NASA order to cut $4 million from the program's budget, mission team members said Monday.
The project, which was originally supposed to run for three months, is now in its fourth year, successfully exploring the terrain of Mars. It costs NASA about $20 million to keep the project going, but due to budget cuts, the space agency is forced to put its child up for adoption, so to speak. As of yet, no billionaire has stepped up to the plate, but I am hoping that someone will soon.
For the cost of a few of your average modern missiles, we are abandoning a program that has been one of NASA's most visible and productive projects.
President Bush recently submitted a $3.1 trillion dollar budget to congress with the biggest proposed increases in defense spending, and homeland security. The Pentagon would get a $35 billion increase to $515 billion for core programs, about 7% with war costs additional (but how much is additional?) This further supports my investment posture for this year and next that the defense sector is the place to be as I posted earlier today and many times over the past few months -- the BIG BUYS.
Some of our big defense contractors, all of which should benefit to some degree include: Boeing (NYSE: BA), General Dynamics (NYSE: GD), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), Raytheon Company (NYSE: RTN), and United Technologies (NYSE: UTX). I am not suggesting that you jump into these stocks immediately, but you should add them to your watch list. Perhaps, for some investors dollar cost averaging into them over six months would make sense. Each has a varying degree of exposure to defense spending. For example, United Technologies is the parent of Sikorsky helicopters which makes the Black Hawk. Lockheed Martin and Boeing make fighter jets. Raytheon makes defense electronics and missile while General Dynamics and Northrop Grumman supply warships to the US Navy. Northrop also makes aerial vehicles that are being used in the Iraq War.
"The weak start to 2008 has left many investors scrambling for a safe haven in which to stash their cash," notes Jocelynn Drake, who sees the defense sector as one such haven.
The analyst with Schaeffer's Investment Research explains, "The recent losses suffered by many of the defense-sector components has brought them back to long-term support, creating potentially strong buying opportunities."
"In addition, they are all currently resting right near support at their ascending 10-month moving averages. These stocks have benefited from this long-term support level and could use their respective trendlines as springboards to launch them on the next leg of their uptrends.
"What also makes these stocks very appealing from a bullish perspective is that short-term options players are very skeptical of the stocks' outlooks. As a result, options speculators have loaded up on bearish bets toward these securities in an attempt to call a top to their rallies.
Earnings (with so much earnings news, I'll try to be brief):
Ford Motor Co. (NYSE: F) reported Thursday it halved its quarterly losses. The carmaker lost $2.7 billion in the fourth quarter and $2.8 billion for the year, down from $5.6 billion and $12.6 billion respectively. Still, while Ford did well in global markets, its gains were dragged down by continued weakness in North America. Excluding special items, Ford lost 20 cents per share for the quarter and 19 cents per share for the year, in line with Wall Street's expectations. Ford shares are showing a decline in premarket trading.
Lockheed Martin Corp. (NYSE: LMT) reported this morning a 10% rise in fourth-quarter profit. Gains in its space, information technology and electronic systems units made up for a dip in sales of fighter jets. Lockheed reported a profit of $799 million, or $1.89 per share on flat net sales of $10.84 billion. These topped analyst estimates as polled by Thomson Financial of $1.69 per share on sales of $10.73 billion. The defense contractor also raised its forecast for 2008 earnings per share.
Xerox Corp. (NYSE: XRX) on Thursday said its profit rose 79% in the fourth quarter to $382 million, or 41 cents per share, pretty much in line with analyst estimates. A mix of cost controls and growth in equipment financing and services were the reason for the profit rise. XRX shares are up 8.6% in premarket trading.
Also reporting today: Microsoft Corp (NASDAQ: MSFT), E-Trade Financial Corp. (NASDAQ: ETFC), Sun Microsystems Inc. (NASDAQ: JAVA), Hershey Co. (NYSE: HSY) and Amgen Inc. (NASDAQ: AMGN) to name but a few. Here's a list from Briefing.com.
MOST NOTEWORTHY: Advanced Analogic, Navios Maritime and Lockheed Martin were today's noteworthy initiations:
JMP Securities started shares of Advanced Analogic (NASDAQ: AATI) with a Market Outperform rating and $13 target, as they are positive on AATI's increasing margins driven by proprietary portable power management designs and cost-effective manufacturing technology.
Cantor assumed coverage of Navios Maritime (NYSE: NMM) with a Buy rating and $21 target and believes the company's focus on long-term charter contracts and substantially fixed operating costs helps provide clear earnings visibility to support its dividend policy.
American Technology views Lockheed Martin (NYSE: LMT) as a compelling long-term investment opportunity given the overall predictability of the sector and an attractive valuation. The firm initiated shares with a Buy rating and $129 target.
OTHER INITIATIONS:
Morgan Stanley initiated SuccessFactors (NASDAQ: SFSF) with an Overweight rating.
It was only last week that Goldman Sachs (NYSE: GS) caused havoc in the stock market (or at least lead the charge) downgrading Citigroup Inc.(NYSE: C), and General Motors (NYSE: GM) among others, but now they have started to express concern that some of the defense sector stocks may be vulnerable to the next president's ax..gif){kind=logo}
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Here are some highlights from this past week's 
Defense contractor Lockheed Martin (NYSE: LMT) posted .gif){kind=logo}
Earnings (with so much earnings news, I'll try to be brief):.gif){kind=logo}
The week in preview: New quarter earnings kick-off
Comfort Zone Investing: Keep your recovery expectations real
Will Americans have to slim down to fit into their cars?
