Record Q3 M&A activity reveals thriving aerospace & defence industry

A Black Hawk helicopter, Sikorskys most well known product. Image courtesy of Wikipedia Commons.
A Black Hawk helicopter, probably the most well-known product from Sikorsky, which was bought earlier this year by Lockheed Martin for $9bn - image courtesy of Wikipedia Commons.

The third quarter of 2015 experienced a record $52bn (£34.5bn) in merger and acquisitions (M&A) activity for the defence and aerospace industry.

The business activity for the sector has boomed so much that the $52bn in announced deal-making value for Q3 exceeds the entire M&A deals for any previous year recorded for the sector, according to a quarterly analysis by PwC US aerospace & defence leader, Chuck Marx.

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The PricewaterhouseCoopers (PwC) ‘Mission control’ analysis features statistics which show that total deal value of M&A has already nearly tripled the 2014 total of $21.8bn with this year’s total currently at $64.3bn, thanks largely to the recent increase in activity in the third quarter.

The record quarter in M&A for the aerospace and defence industry was reached as a result of a number of recent large deals.

Warren Buffett’s Berkshire Hathaway bought Precision Castparts for a record $32.3bn in August, the largest deal ever made in the aerospace and defence industry.

The Pentagon’s prime contractor, Lockheed Martin recently announced that it would take over helicopter maker Sikorsky Aircraft for $9bn, with the deal currently waiting for regulatory approval from China.

British aircraft services company, BBA Aviation, also bought Landmark Aviation for more than $2bn in September.

Revenues also up for aerospace sector

Many aerospace and defence companies have also recorded better-than-expected earnings and revenue during the quarter.

An F-35B makes a vertical landing on an aircraft carrier. Image courtesy of Wikipedia Commons.
An F-35B makes a vertical landing on an aircraft carrier. Image courtesy of Wikipedia Commons.

Lockheed Martin reported better-than-expected earnings along with higher revenues, solid margins and strong cash flows buoyed by robust sales of its F-35 Joint Strike Fighter.

The Boeing Company delivered third-quarter revenue of $25.85bn, exceeding the Zacks Investment Research Consensus Estimate by 4.5% as its earnings also increased by 18% year over year.

Boeing delivered third-quarter adjusted earnings of $2.52 per share (up 13.5% on Zacks estimate), and raised its full-year earnings outlook to the range of $7.95-$8.15 per share from the prior guidance of $7.70-$7.90 per share.

The aerospace giant also lifted its revenue guidance for the year to the range of $95-$97b from the $94.5-$96.5b expected earlier driven by increased commercial delivery outlook.

General Dynamic Corp’s third quarter earnings also exceeded research estimates.

The world’s fifth largest defence contractor saw third quarter earnings of $2.28 per share, which topped the Zacks Consensus Estimate by 8.6% on the back of higher defence orders and solid demand for its Gulfstream airplanes.

Third quarter revenue of $7.99b also surpassed the Zacks Consensus Estimate by 3.1%.

The company’s earnings are expected to be between $8.90 and $9 per share for 2015, up from the $8.70 to $8.80 projected earlier.

Higher deliveries of its Gulfstream business jets and surging sales at the submarine-building unit have help to raise General Dynamic Corp’s profit outlook for 2015.

The new LRS-B aircraft will likely be a similar design to the X-47B drone. Image courtesy of Northrop Grumman.
The new Northrop Grumman LRS-B bomber aircraft will likely be a similar design to the X-47B drone. Image courtesy of Northrop Grumman.

Northrop Grumman is another leading company of the sector to reap the benefits of the record third quarter.

After winning a multibillion-dollar contract to build a new US bomber, the company reported solid third quarter results with revenue and earnings exceeding the Zacks Consensus Estimate by 6% and 2.4% respectively, leading the plane manufacturer to increase its profit outlook for the full year.

United Technologies Corporation also reported third quarter earnings which exceeded the Zacks Consensus Estimate, with the $1.67 per share surpassing the estimate of $1.54.

Aerospace and defence outlook

Following the recent record quarter for M&A and companies exceeding their projected earnings, the outlook for the aerospace and defence industry is promising and the M&A deals are set to continue rolling in, according to PwC.

Head of PwC’s US aerospace and defence practice, Scott Thompson, said the industry will continue to be highly active in 2016 and exceed its recent average for total deal value.

“This year is already a record year, and we believe that 2016 will continue to be very active, and likely above the rolling ten-year average, which will be approximately $25b after 2015,” he said.

“Restructuring, divestitures and spin-offs should continue to remain popular among (aerospace and defence) companies as they look to optimise their portfolios to align with their core capabilities or to simplify their operating models.”

Given the record third quarter, Thompson said he didn’t expect the upcoming fourth quarter M&A to be particularly high, but still above average.

“But I do think that the broader trend is that… we are in a robust environment where we will probably see activity above the average level next year,” he said.