Based on Newport News Shipbuilding
's second quarter earnings increase, strong third quarter performance and high expectations for fourth quarter revenues, research firm Lazard Frères & Co. LLC has renewed its buy rating for the company, and raised its full-year estimate for 2000 to $2.60 from $2.50. Construction programs in aggregate should approach $1 billion next year, an increase from an earlier forecast of $687 million for 1999.
Revenues for the third quarter were $451 million, versus $462 million a year ago, driven by a strong performance in the Fleet Services segment, and more than offset by a decline in construction revenues. The third quarter was the first period in several years that did not include any commercial construction. The last of 10 tankers constructed under the "Double Eagle" program was delivered during the second quarter. The yard retains a 49 percent interest in six of the ships sold to Hvide Marine, Inc. During the third quarter, Hvide filed for Chapter 11 protection, but the tankers are owned through a limited liability corporation that is exempt from this filing. Newport management has indicated that the tankers are operating profitably. However, Hvide remains obligated to buy out Newport's minority stake within the next 12 months. If Hvide is unable to fulfill this agreement, NNS will have greater flexibility to sell its interest.
Construction revenue appears set to show strong sequential improvement during the year 2000, driven by further work on the aircraft carrier Reagan, initial work on the CVN-77 aircraft carrier and a ramp up in construction of the first two Virginia Class attack subs. Revenue is projected at $195 million in the fourth quarter, which will show a sequential improvement over the third quarter and then a steady increase to approximately $250 million per quarter by the second half of year 2000.
Fleet services revenue is projected to decline during 2000 as NNS completes refueling and overhaul programs on the Nimitz and the Eisenhauer. Lazard Frères projects revenue of $665 million for full year 2000, down $230 million from a year earlier. Engineering revenue is projected to continue at a steady pace of about $70-75 million per quarter.
Based on steady, programmed nature of NNS's backlog and earnings, reports Lazard Frères, the company's shares represent an excellent "safe haven" in an otherwise turbulent defense sector. Defense shares have been led down in recent weeks by Raytheon (RTN1.SG)
's problems with digesting recent acquisitions. The same concerns have affected other well-known names such as General Dynamics (GD)
and Litton, both of which have been active in making acquisitions over the past few years. Newport, though, has remained focused on its core business of constructing and servicing the Navy fleet. Newport has also focused its free cash flow on repurchasing its own shares. - (Source: Lazard Frères & Co. LLC)