Cost-Cutting, Share Buybacks Buoy U.S. Defense Profits

The biggest U.S. weapons makers posted higher profits this week and raised their forecasts for 2014 earnings, sending shares higher despite cuts in military spending that have weakened revenues.

The Dow Jones index that tracks the 10 biggest aerospace and defense companies rose 1.75 percent, driven by gains in shares of Lockheed Martin Corp, General Dynamics Corp, and Northrop Grumman Corp, which all reported higher profit and earnings per share this week.

Boeing Co saw a drop in its defense earnings and revenues, but still beat expectations.

Weapons makers are benefitting from workforce reductions and other cost-cutting measures that began around 2007, as well as efforts to return cash to shareholders through stock buybacks and strong dividends, said defense consultant Loren Thompson.

"The gradual decline in military spending has given the companies fewer opportunities to invest in new programs, so they

are returning their cash flow to shareholders," said Thompson, who runs the Virginia-based Lexington Institute.

He said the crisis in Ukraine and other emerging threats could strengthen demand for military equipment in the United States and overseas, and help stave off an expected decline in defense shares as spending cuts further erode revenues.

Lockheed shares were trading up 3.1 percent at $161.52 after Australia announced plans to buy 58 more of the company's F-35 fighter jets in coming years.

Lockheed, the Pentagon's No. 1 supplier, on Tuesday had reported a 23 percent jump in first-quarter net profit and raised its 2014 earnings-per-share outlook by 2.5 percent.

Lockheed, General Dynamics and Northrop all reported higher operating margins.

Northrop, which makes unmanned planes, the B-2 bomber and electronic equipment, on Wednesday reported higher-than-expected quarterly profit and raised its full-year outlook by about 2 percent, to a range of $8.90 to $9.15 per share.

Operating margins hit 14.4 percent in the quarter, up two percentage points from the year-earlier period.

Northrop Chief Executive Officer Wes Bush attributed the rise in earnings per share to the company's performance and share repurchases. Northrop had about 9 percent fewer shares outstanding during the latest quarter.

General Dynamics, which makes Gulfstream business jets, tanks and U.S. warships, raised its guidance for 2014 earnings per share by nearly 4 percent after posting higher-than-expected earnings and revenues in the first quarter.

The company forecast full-year profit of $7.05 to $7.10 a share, up from its previous estimate of $6.80 to $6.85.

Chief Executive Phebe Novakovic told analysts during an earnings call she believed U.S. weapons spending had "troughed," or hit a low point, and said a big rise in backlog showed the company is well-positioned with key programs. She said the firm planned to return "most, if not all," its free cash flow to investors via stock repurchases or dividends.

Novakovic said the company's combat systems division, which posted a quarterly operating loss, would show improved sales, earnings and margins over the course of the year.

The marine division also has "considerable upside" for revenues given that it expects to get a multi-year contract for more Virginia-class attack submarines from the U.S. Navy, and is working on a new submarine to replace the current Ohio-class submarines that carry nuclear weapons, she said.