Avascent defense monthly january 2013

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Avascent defense monthly january 2013

  1. 1. February 2013 ABOUT AVASCENT Avascent is the leading management and strategy consulting firm advising clients who serve government and related commercial marketsExecutive SummaryContractors are reporting 4Q and full year 2012 results including Budget Highlights2013 guidance; as the March 1 sequestration deadline approaches,  Budget uncertainties continue to loominvestors increasingly see sequestration-magnitude cuts as a reality large over defense stock performanceand are locking down 2012 paper profits. We should expect - The Jan. 1 ATRA deal delayed sequestration until March 1, 2013continued volatility through the first half of 2013. and removed $6B from the President’s FY13 budgetMacro Environment - If sequestration is triggered, another Companies began reporting 4Q and full year 2012 results and are $7B installment will be removed from communicating FY13 revenue and EPS guidance to the Street the budget March 31, toward a total Of the companies that have reported to date, the majority believe that of $41B in GFY13 sequestration will be triggered on March 1 and accord high probability - The Pentagon must submit its to a full-year continuing resolution scenario strategy for dealing with Nevertheless, most companies’ FY13 guidance does not account for sequestration to the White House by sequestration—likely because the cuts will not materially affect Feb. 8 business until FY14 - The FY13 CR, funding the federal Industry has reported changes in customer behavior over the quarter government at 2012 levels and as department and program officers begin to prepare for sequestration restricting new starts, also expires and/or a full year CR March 31; a full-year CR will disrupt As Fig. 1 below shows, the Big 5, reporting Jan. 23-Jan. 30, lost 4% to of major programs 8% of their value as investors came to grip with the fiscal realities  According to industry, customer buying impacting the sector; as of Feb. 6, the Big 5 are down ~7% YTD patterns reflect a working assumption Of the Avascent indices, the Hybrid Index has outperformed both the that sequestration and/or a full year CR commercial benchmark and its defense peers; for defense equities, the will take effect downward trend continues into February Figure 1: Avascent Defense and S&P 500 Indices % Change in Share Price, January 2013 -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% Avascent Hardware Index Avascent Hybrid Index Avascent Services Index Big 5 S&P 500 Index 6% GY 4% GEOY FNC 2% SAI 0% FLIR-2% ^DJI HO-4% ^SPX-6% ATK 16-Jan 10-Jan 11-Jan 12-Jan 13-Jan 14-Jan 15-Jan 17-Jan 18-Jan 19-Jan 20-Jan 21-Jan 22-Jan 23-Jan 24-Jan 25-Jan 26-Jan 27-Jan 28-Jan 29-Jan 30-Jan 1-Jan 2-Jan 3-Jan 4-Jan 5-Jan 6-Jan 7-Jan 8-Jan 9-Jan KBR NCI HIISource: Cap IQ; Avascent analysis KEYW QQ. AVAV
  2. 2. Avascent Defense Universe  GY, GEOY and FNC are this month’s top performers. GY has recently secured financing to acquire United Technologies’ space unit, Rocketdyne, which will double GY’s market capitalization. GEOY’s shares are up due to its proposed acquisition by Digital Globe, approved today by GEOY’s board. FNC’s share price movement is influenced by Italian market trends, though the company may also be benefiting from its recently-announced teaming agreement with GD on Air Force T-38 trainers.  RTN’s shares were the biggest losers within the Avascent Defense Index, shedding ~8.5% of their value in January despite strong 4Q and full year results, including a robust FY13 funded backlog. There seems to be no clear explanation, but we can offer two conjectures: From Nov. 2012 through Jan. 21, RTN shares appreciated ~7%; it is likely that investors have decided to lock down some of these paper profits ahead of the earnings release. Investors may have been rotating to other defense stocks, such as GD/NOC; both of these companies have gone through recent corporate resets and may have more margins upside.  LMT’s shares dropped 6% for the month following the company’s announcement that it made a $2.5B contribution to its pension plan; investors are concerned that the move will leave the company with less cash for FY13 share buybacks  With new management at the helm, GD took advantage of the Street’s grace period and recorded a non-cash charge of ~$3B in goodwill impairment and other restructuring costs. The company also announced a significant drop in YoY revenue for Combat Systems (~$800M) due to declining business in European Land Systems Figure 2: Avascent Defense Index Universe Monthly Performance: January 1- January 31 -10% -5% 0% 5% 10% 15% 20% GY Avascent Services GEOY FNC Avascent Hardware SAI FLIR Big Five ^DJI Industry Indices HO ^SPX ATK KBR NCI HII KEYW QQ. AVAV BAH LLL BA. VSEC XLS CACI NOC GD ESLT MANT LMT RTN Source: Cap IQ; Avascent analysis
  3. 3. ABOUT THE AUTHORRoy Levy is an engagement manager with Avascent and lead’s the firm’s analysis of how senior leaders can align theircorporate strategies with capital market signals. Before joining Avascent, Roy was a consultant with the DefenseIndustrial Initiatives Group at the Center for Strategic and International Studies (CSIS) where he led the Wall Streetand the Pentagon project, focusing on the relationships between defense budgets, defense acquisitions policies, andthe financial health of the global defense industrial base.ROY LEVYE. RLEVY@AVASCENT.COMO. 202.280.6877C. 917.921.3160 NOTICE: This document has been prepared and issued by Avascent on the basis of publicly available information. The opinions presented herein are those of the author, are not meant to be comprehensive, and are for informational purpose only. No party should treat any of the contents herein as advice. No part of this document is to be reproduced without written permission from Avascent. © Copyright The Avascent Group (2013). All rights reserved.

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