To create the following list, we screened for aerospace and defense stocks with dividend yields greater than 2%. We then looked for names exhibiting negative trends in inventory, specifically those with faster growth in inventory than growth in revenue year-over-year, as well as stocks with inventory comprising a larger portion of current assets in the same period. This is considered a troubling sign.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned below. Analyst ratings sourced from Zacks Investment Research.
How do you think these stocks will fare given their difficulty clearing inventory? Use this list as a starting point for your own analysis.
1. Lockheed Martin Corporation (NYSE:LMT): Engages in the research, design, development, manufacture, integration, operation, and sustaining of advanced technology systems and products in the areas of defense, space, intelligence, homeland security, and government information technology in the United States and internationally.
- Market cap at $32.69B, most recent closing price at $102.01. Dividend yield is 4.50%
- Revenue grew by -1.97% during the most recent quarter ($11,070M vs. $11,293M y/y). Inventory grew by 21.64% during the same time period ($2,895M vs. $2,380M y/y). Inventory, as a percentage of current assets, increased from 16.35% to 19.47% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-25).
Last quarter, Lockheed Martin saw a 14% jump in profit, earning $761 million in comparison to last year's $668 million, and a 2% drop in sales to $11.1 billion. As the top defense contractor, Lockheed expects a net sale reduction of $825 million due to sequestration. The company now expects its sales to fall within the low range of its January outlook of $44.5 billion to $46 billion.
However, May might be a good month for Lockheed. A May 1st press release announced that the company received a $166.8 million contract extension from NASA, bringing the total contract value to $1 billion. Bloomberg wrote that by the 31st, Lockheed may settle an agreement with the Pentagon for a $9 billion order for up to 60 F-35 jets. These developments follow Lockheed's April $45.65 million Air Force contract modification.
2. Boeing Co. (NYSE:BA): Engages in the design, development, manufacture, sale, and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide.
- Market cap at $71.12B, most recent closing price at $93.74. Dividend yield is 2.06%
- Revenue grew by -2.53% during the most recent quarter ($18,893M vs. $19,383M y/y). Inventory grew by 24.62% during the same time period ($40,797M vs. $32,738M y/y). Inventory, as a percentage of current assets, increased from 65.3% to 68.58% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
Boeing's most recent woes stem from decreasing demand for its 747 cargo freighters. Rising gas prices have made four engine planes like the 747 less appealing to airlines, which are eager to cut fuel costs. Bloomberg reports Dubai Aerospace Enterprise Ltd. cancelled its $1.76 billion order for five 747-8s last week, bringing the grand total of unfilled orders for Boeing's latest jumbo jet to 54.
The 747 news comes on the heels of the FAA's three-month grounding of Boeing's 787 Dreamliner, a debacle that CNBC estimates costs the company over $600 million. Nevertheless, Boeing's first quarter earnings of $1.87 billion, or $1.73 a share, beat analysts' estimates of $1.49 a share in addition to last year's $1.77 billion profit. Per Bloomberg, shares closed up 3% following the quarterly report. Investors should also note the Wall Street Journal claims that Boeing's board has reportedly approved sales of its newest long-range, twin-engine 777 jetliner.
3. United Technologies Corp. (NYSE:UTX): Provides technology products and services to the building systems and aerospace industries worldwide.
- Market cap at $85.6B, most recent closing price at $93.11. Dividend yield is 2.29%
- Revenue grew by 15.97% during the most recent quarter ($14,399M vs. $12,416M y/y). Inventory grew by 21.46% during the same time period ($10,161M vs. $8,366M y/y). Inventory, as a percentage of current assets, increased from 30.04% to 34.84% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
Sequestration is also a concern for United Technologies. According to Bloomberg, United Technologies received 17.5% of 2012's $57.7 billion revenue from the government, and in a March call with investors and analysts, CEO Louis Chenevert said the company can expect up to a $0.10 loss per share due to the cuts. Last month, CFO Gregory Hayes told Bloomberg first quarter sales of spare airplane equipment for the military had dropped by approximately 10%.
On the other hand, the Wall Street Journal reports the company's first-quarter earnings of $1.27 billion, or $1.39 a share, increased from last year's $330 million profit, or $0.36 a share, and surpassed analysts' expectations of $1.29 a share. Additionally, orders increased by 2% at UTC Aerospace Systems, 5% at UTC Climate, Controls & Security, 14% at Pratt & Whitney, and 24% at Otis.
*Accounting data sourced from Google Finance. All other data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.