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Tax changes may give defense companies an 8-13 percent EPS boost, analyst says

Defense contractors command be large winners from the tax reform packages, with Raytheon and Northrop Grumman mass the “top beneficiaries,” according to a report issued Monday.

“The impact of the pending corporate tax rectification to a 20 percent rate could be very favorable for most aerospace and defense companies within our coverage macrocosm with domestic-oriented defense companies well positioned for higher earnings,” indicated Peter Arment, an industry analyst at Baird Equity Research.

With the stoop rate, Baird estimates that defense companies would see an ordinarily earnings per share benefit over the 2018-2019 period of 8 to 13 percent. The defense sector on regular generates about 76 percent of its revenue domestically.

Arment judges the “potential upside impact” on defense stocks would be an average 8 percent change-over, although the report points out Raytheon and Northrop could see even bigger advances and Boeing much less.

Temperate so, Boeing with a tax rate currently above 30 percent wish still benefit from tax reform, Arment wrote. Yet given the commercial aircraft industrialist’s higher international exposure it would see “the smallest” boost among the big defense terms, according to report.

At the same time, the analyst said the lower tax assess also would serve as “a strong incentive to repatriate cash to reserve R&D efforts, certain program production expansions, general domestic investment and upper case redeployment (especially buybacks and M&A).”

The Senate passed its tax overhaul proposal on Saturday after the Enterprise earlier approved its own tax reform legislation. A conference committee now is tasked with ironing out inequalities between the two bills.

Overall, Arment estimates the current average tax bawl out for the aerospace and defense group is about 28 percent. The analyst supports Northrop and Raytheon as “top beneficiaries” along with a few small-, mid-cap competitors, including BWX Technologies, Spirit AeroSystems and TransDigm Group.

In October, Raytheon, in updating its 2017 pecuniary outlook, said that its effective tax rate was expected to be about 30 percent. Beneath tax reform, though, the maker of the Patriot air defense missile system pass on likely see a lower tax rate in 2018.

Northrop, which is building the Air Force’s top-secret B-21 underhandedness bombers, has an estimated tax rate for 2018 of about 29 percent, but Baird guesstimates that would shift lower under the tax reform proposals and offer the company potentially an EPS benefit of 10 percent.

According to Baird’s Arment, BWX and Feeling AeroSystems would be well-positioned to benefit from tax reform by having a height domestic revenue base. He estimates that EPS for the two could be revised upward by varied than 10 percent.

Lockheed Martin and General Dynamics, which both mediocre about 27 percent tax rates, could see potential EPS improvements of 7 to 8 percent, Baird thinkings.

Baird estimates Boeing’s projected tax rate of 32 percent devise come down and could end up helping to benefit earnings by about 5 percent.

Similarly, the researcher sentiments that Honeywell International and United Technologies would see potential EPS upswings of 4 percent and 6 percent, respectively.

The “less favorable” tax rate cut for Boeing, Honeywell and Unified Technologies is due to the three large aerospace manufacturers having an average domesticated revenue base of about 53 percent, Arment said. After all, the analyst said the three aerospace giants would see a “positive” bump on the repatriation rules under tax reform.

“Both UTX an HON have the majority of their spondulicks overseas, which totals $8.5 billion and $10 billion, each to each,” the analyst wrote. “HON has also commented that with a favorable become in the repatriation rules [it] would bring all options on the table from crucial M&A to large share repurchases.”

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