The deadly ISIS attacks in Paris last week will be an important factor that might push for a sharper rise in the defense budget. House GOP leaders are looking to boost spending in campaign against the ISIS. Again, the State Department has approved a big foreign military sales (FMS) deal of U.S. weapons to Saudi Arabia to help the latter to restock supplies for its battle against the Islamic State in Syria.

The Pentagon’s prime contractor, Lockheed Martin (LMT - Analyst Report), clinched a big contract to build 17 C-130J military transport aircraft.

Northrop Grumman (NOC - Analyst Report) has been asked by the U.S. Air Force to halt its work on the multi-billion dollar contract for the Long Range Strike-Bomber (“LRS-B”).

(Read Defense Stock Roundup for NOV 10, 2015 here.)

Recap of the Week’s Most Important Stories

1.  House Republicans are seeking to lift funding for combating the ISIS through Overseas Contingency Operations or OCO, per the Chairman of the House Armed Services Committee. Not specifying any defense budget, he said that he and others have been tasked by the House leadership "to work together on a response to ISIS and terrorism" that might involve moving money within the existing OCO account this year or next year.

Meanwhile, the Pentagon’s Defense Security Cooperation Agency has notified lawmakers last week that the State Department has approved the proposed $1.29 billion FMS deal pertaining to U.S. weapon sales to Saudi Arabia. This sale would help Saudi Arabia to restock supplies used in its battle against insurgents in Yemen and air strikes against the Islamic State in Syria.

The proposed sale comprises 22,000 smart and general-purpose bombs, including 1,000 GBU-10 Paveway II Laser Guided Bombs from Raytheon (RTN - Analyst Report) and over 5,000 Joint Direct Attack Munitions kits from Boeing (BA - Analyst Report) to turn older bombs into precision-guided weapons using GPS signals.

In October, the Pentagon notified the Congress of a planned sale to Saudi Arabia of as many as four Littoral Combat Ships made by Lockheed for $11.25 billion.

2.    Lockheed Martin Corp. has landed up with a $968.7 million contract to build 17 C-130J military transport aircraft. The company’s Aeronautics business unit won this modification contract under which it will deliver the aircraft in various configurations: nine MC-130J, six C-130J-30, one HC-130J, and one KC-130J. The work will be performed in Marietta, GA, and is slated for completion by Apr 30, 2020.

Separately, this prime defense contractor has been awarded a $262.8 million contract by the U.S. Air Force to provide F-15 sniper targeting system and radars for the Kingdom of Saudi Arabia (read more: Lockheed Wins Contract for Saudi Arabia's F-15 Sensor Suite).

3.  United Launch Alliance (“ULA”), a joint venture of Lockheed Martin and Boeing, has won a modification contract worth $373.3 million from the U.S. Air Force to provide launch vehicle production services for National Reconnaissance Office (“NRO”) rockets (read more: Boeing-Lockheed JV Wins $373 Million Modification Contract).

Meanwhile, ULA has opted out of the U.S. Air Force’s (USAF) space launch competition citing inability to buy the required number of Russia-made RD-180 engines. A couple of other factors also held back ULA from participating in the bid. One of the clauses in the contract specified that the “lowest price, technically acceptable” deal will be selected.

Even though ULA is noted for its superior quality, SpaceX has an edge in terms of price. Additionally, the contract asked bidders to separate funds received from the Air Force for operating launch facilities from the bid, which ULA failed to do (read more: Boeing-Lockheed JV Opts Out of Space Launch Competition).

4.  Northrop Grumman Corp. has secured a $151.3 million contract modification from the U.S. Navy to build one E-2D Advanced Hawkeye aircraft for Japan under an FMS agreement. The company will perform work in Florida, New York, California, Indiana, Illinois and other U.S. locations. The contract is expected to run through Mar 2018.

Separately, the U.S. Air Force has asked Northrop Grumman to stop work on the LRS-B contract, after the company’s rivals, Boeing and Lockheed Martin, filed protests against the selection process alleging that it was “fundamentally flawed” (read: Northrop Forced to Stop LRS Bomber Work Amid Protest).

5.  Boeing has sealed two big ticket programs from the U.S. Department of Defense. A $130.1 million modification contract covers FMS production of GBU-39 Small Diameter Bombs, or SDB. This modification would increase the ceiling value of a previously awarded SDB I production contract from $98 million to $228.1 million.

SDB consists of a carriage system and a precision-guided weapon designed to soar more than 60 nautical miles and strike targets with minimal collateral damage. The Air Force Life Cycle Management Center is the contracting activity and Boeing is scheduled to complete work by Apr 15, 2019.

The second contract, worth $101.6 million, is also a modification contract for the integrated logistics support and site activation for full-rate production II and III (Lots 6 and 7) of the P-8A aircraft for the Navy and the government of Australia. The work under this contract is scheduled to be completed by mid 2018 and will be performed in Seattle, St. Louis, Oklahoma City and Huntington Beach, CA.

Performance

In the last five trading days, share prices of the major defense companies made a comeback with all ending in the green barring General Dynamics Corp. (GD - Analyst Report). Raytheon gained the most, followed by L-3 Communications Holdings (LLL - Analyst Report).

In the last six months, the picture also seems to be a little reassuring with gains predominating over losses. Northrop Grumman gained the most with an almost 19% share price appreciation followed by Lockheed Martin. Rockwell Collins (COL - Analyst Report) and Textron (TXT - Analyst Report) were in the red territory.

The following table shows the price movement of the major defense players over the past five trading days and during the last six months.
 

What’s Next in the Defense World?

In the next five days, no major development is lined up on the defense front. We note that defense stocks have been experiencing volatility with gains and losses in recent months and investors can expect this volatile movement to continue in the coming days as well. However, continuing geo-political uncertainties and the threat of terrorist attacks will keep defense stocks in focus in the near future.