Defense Stocks Soar to New Highs; Higher Highs Are Coming

Key Points

• Defense stocks like Lockheed Martin are supported by demand and raising their guidance. 
• RTX and Northrup Grumman echo Lockheed's strengths, including the F-35 program. 
• Analysts are raising their price targets and leading these stocks to new highs. 

Defense stocks soared in July, with many gaining double-digit figures ranging from 10% to 18%. Good results drive the moves, and the demand trends suggest that business will stay good. A trend in escalated global tensions, ongoing conflicts in Ukraine and the Middle East, and re-armification pushed global defense spending up by 6.8% in 2023, hitting an all-time high. Spending in 2024 is escalating, accelerating the growth to double-digits, as seen in defense stock results. 

Defense Stocks Results Are Good: Prices Make a Sonic Boom

The Q2 results from leading defense contractors like Lockheed Martin NYSE: LMT, RTX Corporation NYSE: RTX, and Northrup Grumman NYSE: NOC are a chorus of good news for investors. All reported significant top- and bottom-line strength and raised guidance to above the consensus estimates. The growth drivers are diverse, with strength in most reporting segments and noteworthy mention of aerospace. Northrup Grumman reported a 14% increase in its Aerospace segment, including demand for F-35 components, a strength that carries through the grouping. 

Lockheed Martin reports a 6% increase in its Aeronautics division and stronger results in Missile & Fire Control and Rotary & Mission Systems. RMS, which includes AI-enhanced drones, led with a 16% gain. RTX reported similar strength in its Aerospace units, partly due to the F-35 program and demand for components and aftermarket products and services. The primary takeaway is that business continues to build, with new contracts and deals announced by all since their Q2 releases, to strengthen already robust backlogs. Backlogs have reached record levels, nearing $500 billion, more than 2.5x their aggregated 2024 consensus revenue estimate.

Analysts are responding well to the news and aiding the updraft for their share prices. The news sparked a series of upgrades and price target revisions for each, with many upgrades to Buy from Hold, signaling a shift in the wind. The price targets are leading to higher prices, with the range of fresh targets implying a mid-single to moderate double-digit upside for them all.  

Bank of America analysts view the resumption of F-35 shipments as a key growth driver but not the only growth vector. They note the critically low munitions inventory globally, the need to replenish, and the demand for legacy programs and ramping technologies. Among those are next-gen missile systems that are seeing demand in the Ukraine theater. 

Defense Stocks Are Building Significant Value for Their Shareholders

Capital returns from the defense contractors are robust and include dividends and share buybacks. The dividend highlights include yields that range from 1.7% to 2.3%, a history of distribution increases, and healthy balance sheets to support them. Share buyback activity is robust, reducing share counts by an average of roughly 5% in Q2 for the group, and an expectation for them to continue. Lockheed Martin, the group leader, also leads in capital return. 

This means that the uptrend in the defense sector is ongoing, and trend-following signals are in play. The markets for these stocks are moving higher and are likely to set fresh highs repeatedly over the next few quarters. The LMT charts show that this market has come out of some turbulence experienced over the last few years and is ready to move higher. The monthly chart shows a strong green candle, moving up to the top of a channel that could break now that growth is accelerating and profits are improving.

The market laggard is Northrup Grumman, which is set up for the biggest gains. This market is moving up from solid support, tracking toward the top of a consolidation range that will likely break when reached. In that scenario, NOC shares could sustain a multi-quarter uptrend until an end to the defense spending cycle comes in sight.