The defense sector is usually a solid choice for investors. That's because defense is one of the line items in the national budget that rarely gets cut. This presentation will identify seven stocks in the defense sector that present investors with a good opportunity to profit from increased government spending.
On December 23, 2022, President Biden signed the National Defense Authorization Act into law. This approved $816.7 billion in funding for the United States Department of Defense (DoD).
Some of this money is going to fund salary increases for our enlisted personnel. But a lot of it will be spent on other projects. In the 2023 budget, the bill provides $143.9 billion for defense procurement of things such as new weapons, vehicles and systems. It also provides $131.7 billion for research, development, test and evaluation (RDT&E).
So if you're looking for a sector that should be red hot in 2023, the defense sector should be near the top of your list. Here are seven stocks for you to consider.
Quick Links
- Lockheed Martin
- Raytheon
- Northrop Grunman
- BWX Technologies
- Ducommun Incorporated
- Kratos Defense & Security Solutions, Inc.
- AAR Corp.
#1 - Lockheed Martin (NYSE:LMT)
As you would expect in the current geopolitical situation, Russia’s war on Ukraine will continue to be a catalyst for defense spending in 2023. Lockheed Martin Corporation (NYSE: LMT) manufactures the Javelin anti-tank missiles which continue to be delivered to Ukraine.
And investors would expect the contractor to benefit from the National Defense Authorization Act. However, the Republican-controlled House of Representatives is eyeing the federal budget and the U.S. aid to Ukraine among the $75 billion it wants to cut from the defense budget. That may not go anywhere, but it could be a headwind for the stock.
As of January 13, 2023, the stock was testing a level of support at around $447. If it fails to hold that level, investors could be looking at a range of $430-$432 for the stock. But if support holds, there’s reason to believe that LMT stock could post a new all-time high as it did late in 2022.
But long-term investors will benefit from a reliable dividend that currently yields 2.68% and has been growing for 20 years.
About Lockheed Martin
Lockheed Martin Corporation, a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. The company operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space segments.
Read More - Current Price
- $489.02
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 9 Buy Ratings, 4 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $612.29 (25.2% Upside)
#2 - Raytheon (NYSE:RTX)
The next stock on this list is Raytheon Technologies Corporation (NYSE: RTX) and investors will notice that the fundamental and technical signals for Raytheon are similar to Lockheed Martin.
Raytheon manufactures the Stinger air-defense systems being used in Ukraine. However, as noted in 2022, missile defense systems make up a significant part of the U.S. defense budget. This is because the country continues to assess threats from nuclear capability countries.
From a technical standpoint, Raytheon hit an all-time high in April 2022. The stock’s late 2022 gains have not approached those levels, but it doesn’t mean it couldn’t reclaim them. That being said, like LMT stock, RTX stock is currently testing a key level of support and could have further to fall.
And like Lockheed Martin, investors looking for income can count on Raytheon’s dividend, which currently yields just over 2.24%. The company has increased its dividend in each of the last 29 years.
About RTX
RTX Corporation, an aerospace and defense company, provides systems and services for the commercial, military, and government customers in the United States and internationally. It operates through three segments: Collins Aerospace, Pratt & Whitney, and Raytheon. The Collins Aerospace Systems segment offers aerospace and defense products, and aftermarket service solutions for civil and military aircraft manufacturers and commercial airlines, as well as regional, business, and general aviation, defense, and commercial space operations.
Read More - Current Price
- $116.48
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 7 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $177.93 (52.8% Upside)
#3 - Northrop Grunman (NYSE:NOC)
Northrop Grunman (NYSE:NOC) is the last of the large defensive stocks on this list. One reason is that it continues to be a benefactor of the Russia-Ukraine war. The company also received confirmation of a $12.8 million modification contract for the F-35 Joint Strike fighter aircraft.
That’s not doing much for NOC stock which is down 14% in a week where the broader market is slightly in the green. This recent dip has knocked its price-to-earnings (P/E) ratio down to 13x. However, there’s no reason to believe that the company can’t justify a more premium valuation making now a great time to consider getting in on NOC stock.
Northrop Grunman pays a dividend yield of 1.51% as of this writing. However, the company has been increasing its dividend for 19 consecutive years. And it has a compelling annual payout per share of $6.92.
About Northrop Grumman
Northrop Grumman Corporation operates as an aerospace and defense technology company in the United States, Asia/Pacific, Europe, and internationally. The company's Aeronautics Systems segment designs, develops, manufactures, integrates, and sustains aircraft systems. This segment also offers unmanned autonomous aircraft systems, including high-altitude long-endurance strategic ISR systems and vertical take-off and landing tactical ISR systems; and strategic long-range strike aircraft, tactical fighter and air dominance aircraft, and airborne battle management and command and control systems.
Read More - Current Price
- $469.54
- Consensus Rating
- Hold
- Ratings Breakdown
- 5 Buy Ratings, 10 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $553.27 (17.8% Upside)
#4 - BWX Technologies (NYSE:BWXT)
Until now, we’ve been looking at large-cap defense stocks. For the rest of this presentation, we’re going to look at one mid-cap and three small-cap options that investors may want to consider. The first is BWX Technologies, Inc. (NYSE: BWXT).
This mid-cap stock is a play on the uranium boom as much as it is a play on defense. That’s because it produces, among other things, nuclear fuels, nuclear propulsion equipment, and materials for nuclear medicine. One of the current revenue drivers for the company is the small nuclear reactors and fuel it sells to the U.S. Navy. This area of the U.S. defense infrastructure is becoming a high priority because a nuclear-powered fleet can sail for longer without refueling.
And the company also stands to benefit from the Inflation Reduction Act, which provides incentives to companies that provide clean energy generation sources, which includes nuclear power.
BWXT stock is trading at around 16x earnings and looks undervalued compared to the sector average of around 28x earnings.
About BWX Technologies
BWX Technologies, Inc, together with its subsidiaries, manufactures and sells nuclear components in the United States, Canada, and internationally. It operates through two segments, Government Operations and Commercial Operations. The Government Operations segment designs and manufactures naval nuclear components, reactors, and nuclear fuel; fabrication activities; and supplies proprietary and sole-source valves, manifolds, and fittings to naval and commercial shipping customers.
Read More - Current Price
- $113.28
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 6 Buy Ratings, 1 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $124.57 (10.0% Upside)
#5 - Ducommun Incorporated (NYSE:DCO)
Ducommun Incorporated (NYSE: DCO) is the first of three small-cap stocks that will close out this list. Ducommun is the smallest of the three, with a market cap of just $687 million as of this writing.
But don’t let that fool you. The company provides essential equipment to its customers. This includes circuit boards, avionics racks, radar enclosures, and surge protectors. Not exciting stuff but extremely necessary. That’s reflected in the company’s stock price. DCO stock was up 24% in 2022 and 10% in the early stages of 2023.
And investors can buy DCO stock at an attractive valuation at just over 5x earnings which is cheaper than about 87% of the companies in a sector where companies average 28x earnings. The company has one of the healthiest profit margins in the industry at about 19%, which is well above the sector average of 6.76%.
About Ducommun
Ducommun Incorporated provides engineering and manufacturing services for products and applications used primarily in the aerospace and defense, industrial, medical, and other industries in the United States. The company operates through two segments, Electronic Systems and Structural Systems. The Electronic Systems segment provides cable assemblies and interconnect systems; printed circuit board assemblies; electronic, electromechanical, and mechanical components and assemblies, as well as lightning diversion systems; and radar enclosures, aircraft avionics racks, shipboard communications and control enclosures, printed circuit board assemblies, cable assemblies, wire harnesses, interconnect systems, lightning diversion strips, surge suppressors, conformal shields, and other assemblies.
Read More - Current Price
- $61.89
- Consensus Rating
- Buy
- Ratings Breakdown
- 4 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $73.00 (18.0% Upside)
#6 - Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS)
Kratos Defense & Security Solutions, Inc. (NASDAQ: KTOS) is a small-cap stock that invests in the new face of warfare. The San Diego-based company provides products and services like satellite communications, turbine technologies, and rocket support services for its customer base of defense contractors.
But what has many investors excited is that it manufactures advanced military drones. One example of this is the XQ-58A Valkyrie drone which will be one of the only fully stealth drones in the world.
In 2022, the company increased its revenue by $28 million annually. The company also recently announced receipt of a $174 million contract from the U.S. Navy.
KTOS stock has a 50% upside, according to the analysts surveyed by MarketBeat. And if the company can meet its revenue and earnings projections over the next five years, that price projection may be too light.
About Kratos Defense & Security Solutions
Kratos Defense & Security Solutions, Inc operates as a technology company that addresses the defense, national security, and commercial markets. It operates through two segments, Kratos Government Solutions and Unmanned Systems. The company offers ground systems for satellites and space vehicles, including software for command and control, telemetry, and tracking and control; jet-powered unmanned aerial drone systems, hypersonic vehicles, and rocket systems; propulsion systems for drones, missiles, loitering munitions, supersonic systems, spacecraft, and launch systems; command, control, communication, computing, combat, intelligence surveillance and reconnaissance; and microwave electronic products for missile, radar, missile defense, space, and satellite; counter unmanned aircraft systems, directed energy, communication and other systems, and virtual and augmented reality training systems for the warfighter.
Read More - Current Price
- $25.87
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 6 Buy Ratings, 5 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $26.40 (2.0% Upside)
#7 - AAR Corp. (NYSE:AIR)
AAR Corp. (NYSE: AIR) is a small-cap stock packing a nice punch for investors. The company is headquartered in Illinois and provides parts such as engine and airframe parts to companies in the defense sector.
Like many companies that relied on the aviation sector, AAR saw its revenue and earnings drop at the onset of the Covid-19 pandemic. But what’s behind them and the company is posting year-over-year increases in earnings per share. And that strong earnings growth is projected to continue at over 20% for the next five years.
Not surprisingly, AIR stock has made up all of its losses at the start of the pandemic Analysts tracked by MarketBeat give the stock a consensus price target of $54.50, which is a 10% increase from its current price. And on January 9, 2023, Truist Financial affirmed its buy rating on the stock while boosting its price target from $52 to $57.
About AAR
AAR Corp. provides products and services to commercial aviation, government, and defense markets worldwide. The Parts Supply segment leases and sells aircraft components and replacement parts. The Repair & Engineering segment provides airframe maintenance services, such as airframe inspection, painting, line maintenance, airframe modification, structural repair, avionics service and installation, exterior and interior refurbishment, and engineering and support services; component repair services comprising maintenance, repair, and overhaul (MRO) services, engine and airframe accessories, and interior refurbishment; and landing gear overhaul services, including repair services on wheels and brakes.
Read More - Current Price
- $60.57
- Consensus Rating
- Buy
- Ratings Breakdown
- 5 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $81.00 (33.7% Upside)
Institutional investors are legendary for saying one thing and doing another. One way for savvy investors to get a sense of what institutions are buying is to look at the holdings in sector ETFs. In the case of defense stocks, one of the most popular is the iShares U.S. Aerospace & Defense ETF (BATS:ITA).
The fact sheet for this ETF, and other ETFs like it, list the top holdings for the ETF. This gives you an idea of the stocks that they believe will be among the best performing in the sector. And several stocks on this list are among the largest holdings of the ITA ETF.
But investing is also about diversification. That's why this list includes several stocks that may not be on the radar of the institutions now. And that makes it a good time to accumulate some shares at a lower price.
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