By Doug Cameron
Northrop Grumman Corp. and Raytheon Co. on Thursday both pledged
to boost research spending and exports, but the two defense
companies received sharply different reactions from investors.
Raytheon shares fell 2.5% after fourth quarter profits and 2015
guidance fell short of analysts' expectations, while company
executives said it was open to more acquisitions.
Northrop delivered in-line profits and guidance, but hinted it
was likely to continue directing most of its free cash to
shareholders. The company has led the sector in buybacks, and is on
track to complete its plan of retiring a quarter of its shares
outstanding by the end of the year. Its stock rose almost 4% to
reach an all-time high.
Investors have questioned when defense companies will return to
growth by internal investment or deal-making after three years of
declining sales. However, analysts said there was little benefit in
being first to dial back the level of buybacks that have helped
defense stocks outperform the market for two years.
Raytheon said it would retain a balanced capital allocation
strategy that includes buybacks and dividends, as well as pension
payments, but is eyeing more deals in cybersecurity and electronic
warfare. It paid $420 million last November for Blackbird
Technologies, making it the largest supplier of intelligence
systems to U.S. Special Forces.
"We're not looking at acquisitions simply to buy growth," said
Chief Financial Officer Dave Wajsgras in an interview.
He said Raytheon was boosting company-funded R&D to close to
3% of revenue from the low-2% range and plans to keep it there. The
Pentagon wants defense companies to invest more of their funds and
take on more risk
The Waltham, Ma.-based company derives 30% of its sales from
international customers attracted to its lineup of missile-defense
systems, leading other U.S. contractors in countering a flat U.S.
defense budget with more overseas deals.
Defense analysts have questioned whether U.S.
companies--handicapped against existing and emerging competitors by
U.S. government restrictions on exporting sensitive military
technology--can compensate for the flat Pentagon budget by selling
more weapons overseas.
A recent McKinsey & Co, report estimated that the big U.S.
defense companies would only mange to substitute $31 billion of
international sales to counter $50 billion of Pentagon cuts between
2012 and 2015.
Northrop Chief Executive Wes Bush said its international sales
rose 20% last year and are set to account for 15% of revenue in
2015, with South Korea and Japan lined up to buy its high-end
military drones.
Mr. Bush said internal research spending increased 12% last year
and was set to rise again in 2015.
Northrop reported a fourth quarter profit of $506 million, or
$2.48 a share, up from $478 million, or $2.12 a share, a year
earlier. The company forecast 2015 per-share earnings of $9.20 to $
9.50 and sales of $23.4 billion to $23.8 billion.
Raytheon reported net profit of $586 million for the quarter to
Dec. 31 compared with $533 million a year earlier, with per-share
earnings rising to $1.86 from $1.46. Full-year sales of $22.8
billion, and are expected to be flat or slightly down in 2015.
Tess Stynes contributed to this article.
Write to Doug Cameron at doug.cameron@wsj.com
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