We are updating the allocation of points in our “Balance of Power” short-term
outlook. The total number of points is 1,700: 100 for each stock in our coverage
universe. We summarize our thoughts on the rankings below:
• 787 Schedule Release Could Be a Plus for Stocks. We expect BA to disclose
a new 787 first flight/first delivery schedule this month, and given the terrible
sentiment out there we think it could actually be a positive for the affected
stocks. This is not for the faint of heart, and since we make one month calls on
every stock we cover every month, we need to take a position on this topic one
way or the other. Anecdotal evidence, such as the recent conversations between
BCA and Qatar Airways on a new schedule, shows that the company is out
making new commitments to customers, suggesting both that the announcement
could come sooner rather than later and that it may not be as bad as some of the
most dire predictions we have been hearing (1+ year delay) from investors. We
are therefore raising BA to 115 (+30) and SPR to 110 (+25) for the month of
August. These are one-month, higher risk picks based on this single potential
catalyst and we maintain our concerns about both stocks.
• Raising LMT to Top Large Cap Pick. We are raising LMT to 125 (+15) after
it was the worst performer in our group last month (-11% underperformance).
We recently upgraded the stock to OW following a disappointing Q2 caused by
IS&GS weakness. While we had already anticipated pressure in services and
expect it to continue, LMT still looks well-positioned for the impending budget
downturn, primarily due to its position on F-35, and the recent sell-off provides
a more attractive entry point in our view. Among other defense large caps, we
are lowering LLL to 90 (-25) after it was the best defense performer last month
(+9% outperformance). We are also lowering RTN from the top spot to 100 (-
25) following a solid quarter. NOC remains at the bottom of our large cap
rankings following our downgrade to N. With Congress going on recess until
after Labor Day, it could be a slow month for defense catalysts.
• Lowering ATK to 80 (-20). The Augustine Commission expects to issue
recommendations for the manned space flight program in late August, which
could include altering or abandoning the Ares program, a crucial piece of ATK’s
outlook. The stock underperformed by 8% last month, likely due to this issue,
but it could fall further if the recommendations are unfavorable. ATK also
reports Q1 Aug 6, and the outlook for space and civil ammo could be tougher.
• HRS Remains at Bottom of SMID Rankings. HRS reports Q4 Aug 12 and we
believe FY10 expectations could come down further. RF backlog was only
~$500 mln at March 31, we expect ~$400 mln of sales in the June quarter, and
HRS has announced few new orders in recent months. Backlog coming into
FY09 was nearly $1 bln and RF sales should be ~$1.7 bln for the year.
• Please see the body of our note for our price targets, methodologies, and
risks, as well as an aerospace/defense catalyst calendar.