As General Dynamics (GD) and Raytheon (RTN) get ready to report their latest quarterly results, investors could look to Honeywell International's (HON) results for insight into the market for business jets.
During Honeywell's conference call last Friday following its quarterly results, CFO Thomas Szlosek said, "The demand environment in business jets is slower than we anticipated, and we expect this trend to continue in the second half."
Honeywell saw its aerospace sales decline 1% or 2% on a core basis, which was below expectations and primarily was due to weaker-than-expected sales in Defense and Space.
Both General Dynamics and Raytheon, which are reporting Wednesday and Thursday, respectively, could see similar results, especially given their exposure to business jets.
"Business jet orders will be in focus given concerns about weak demand, underscored by General Dynamics' lowest jet orders since 2009 in 1Q," said Bloomberg Intelligence analyst Douglas Rothacker in a July 20 research note.
General Dynamics already delivered four fewer business jets in the first quarter compared to the same period a year prior, as weak foreign demand led to production rate cuts, according to Rothacker.
Rothacker also said production cuts will likely continue to push aerospace revenue gains down to a low-to-mid-single digit pace, "though profitability is buoyed by stable deliveries of higher-margin G650s."
General Dynamics' stock was holding relatively flat ahead of its quarterly results. Analysts are forecasting adjusted earnings per share of $2.32 on revenue of $7.87 billion.
Meanwhile, Jefferies analysts said in a July 18 research note that defense ranked at the top of the S&P Aerospace Index for the latest 12-month performance period, with sharp advances at Raytheon, among others. But Jefferies also mentioned that "commercial lagged," adding that "expectations that demand will sharply end for civil jetliners appear to be influencing valuations."
The analysts are projecting earnings at Raytheon of $2.02 per share on revenue of $5.85 billion. The analyst team with Jefferies also noted that Raytheon's earnings "could expand 22% due to a gain of about $0.50 per share due to the reformation of a joint venture."
Wells Fargo analysts outlined the joint venture structure in a July 11 research note. They said the ThalesRaytheonSystems joint venture was restructured to focus on the delivery of Air Command and Control System, Theater Missile Defense and Ballistic Missile Defense to NATO agencies and member nations. The venture will become a wholly owned subsidiary of Raytheon.
According to the Wells Fargo analysts said, "RTN's electronics focus reduces its platform-specific exposure, and therefore, lowers its risk of a significant cut in revenue, earnings, or cash flow as a result of any cancellation or cutback."