Early in 2023, Russia's war with Ukraine was the primary geopolitical conflict affecting defense stocks. But for many investors, that wasn't enough to stir broad movement in defense stocks.
However, as investors are now aware, Israel is at war with Hamas. As of this writing, it's not clear whether this will draw the United States into a broader conflict in the Middle East. Even if our military does not get directly involved, the U.S. is now being asked to provide weapons and systems for two countries.
The proposed U.S. defense budget in 2024 is $842 billion. There was talk of cutting the defense budget as part of the budget showdown earlier in 2023. With many flashpoints now in play, it's unlikely the budget will be cut and may, in fact, wind up growing.
That scenario will be bullish for revenue and earnings for defense stocks. And since earnings are a solid predictor of stock price growth, investors can have confidence that the stocks of these companies have room to move higher.
Quick Links
- Lockheed Martin
- Northrop Grumman
- RTX
- General Dynamics
- Palantir
- CAE
- Redwire
#1 - Lockheed Martin (NYSE:LMT)
Lockheed Martin Corporation (NYSE: LMT) is one of the most well-known names in the defense sector. The company touches many aspects of the defense industry, including aeronautics, missiles and fire control, rotary and mission systems, and space.
It's also the stock on this list with the highest price tag per share. As of this writing, shares of LMT stock are changing hands at $451.44. However, the stock remains attractively valued with a forward price-to-earnings (P/E) ratio of 16.69x.
Lockheed Martin generates 50% of its revenue from government contracts. That means an approved defense budget should be top of mind for investors.
But the stock is up 24% in the last three years and 44% in the previous five years. That reflects the consistency that growth investors can expect from owning the stock. But the story gets better when you consider the company's dividend. Lockheed Martin has increased its dividend for 21 consecutive years and currently has an annual payout of $12 per share. That dividend is supported by free cash flow, which totaled $2.5 billion in the third quarter of the company's fiscal year first quarter.
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 - Northrop Grumman (NYSE:NOC)
Despite a surge in late October that pushed it above 52-week lows, Northrop Grumman Corporation (NYSE: NOC) is down over 13% in 2023. However, the stock has bounced off what has been a level of support that had been in place since August 2022. From a technical standpoint, investors will wait to see if NOC stock can stay above an area of resistance around $480.
The reason for the recent surge has to do with the company's revenue and earnings in October 2023. Both numbers beat analysts' expectations and were higher YoY.
Of the stocks on this list, Northrop has the highest forward P/E ratio at just over 20x earnings. Combined with anticipated earnings growth of just over 6% in the next year, NOC stock may be fairly priced.
However, investors are getting a strong dividend. The yield of 1.59% is not impressive at face value but reflects the price you pay for NOC stock. The more important consideration for investors is 20 consecutive years of dividend growth and an annual per-share payment of $7.48.
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)
#3 - RTX (NYSE:RTX)
RTX (NYSE: RTX) is the combination of the Raytheon Technologies Corporation, Collins Aerospace and Pratt & Whitney. The company claims that approximately 50% of the world is protected by RTX products.
The company continues to post year-over-year (YoY) gains in revenue and earnings, and with a substantial backlog of projects, this pattern is likely to continue well into the future. That will allow investors to focus on other fundamentals like the company's $9 billion free cash flow expected in 2025.
RTX stock is up 51% in the last three years but is still well below its all-time close of $150.20 in late 2019. This gives investors a long runway for future growth and includes a modest dividend that currently has a 2.87% yield.
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)
#4 - General Dynamics (NYSE:GD)
General Dynamics Corporation (NYSE: GD) offers world-class products through its portfolio of aerospace, marine systems, combat systems, and technologies. In October 2023 alone, the company received three contracts from the U.S. Navy totaling more than $1.63 billion.
In the company's October 2023 earnings report, General Dynamics reported a record backlog of $95.6 billion. This will fuel further growth for the company while allowing it to continue paying down its debt.
GD stock has a forward P/E ratio of around 19.3x, which is in line with the sector average. Investors are also likely to benefit from the projections for earnings growth of over 18%. That growth may not be fully priced into the stock, which is expected to grow by over 8%.
And investors also get access to a Dividend Aristocrat. General Dynamics has increased its dividend for 32 consecutive years. The dividend yield is currently 2.16% and pays $5.28 per share annually.
About General Dynamics
General Dynamics Corporation operates as an aerospace and defense company worldwide. It operates through four segments: Aerospace, Marine Systems, Combat Systems, and Technologies. The Aerospace segment produces and sells business jets; and offers aircraft maintenance and repair, management, aircraft-on-ground support and completion, charter, staffing, and fixed-base operator services.
Read More - Current Price
- $263.64
- Consensus Rating
- Hold
- Ratings Breakdown
- 9 Buy Ratings, 9 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $314.88 (19.4% Upside)
#5 - Palantir (NASDAQ:PLTR)
Up to now, the defense stocks listed have been the blue-chip names of the sector. Palantir Technologies, Inc. (NYSE: PLTR) is becoming a well-known name, but for some investors, the company's reputation is more notorious than one of notoriety.
In the most simplistic definition, the company is an enterprise software company focused on AI and big data analytics. When the company went public in 2020, it relied heavily on government business, particularly from the U.S. Department of Defense (DOD).
Today, Palantir continues to grow its business with the U.S. government, which is also proving to be a test case for the company's artificial intelligence platform, named AIP, which is based on three core pillars to ensure that the large language models and cutting-edge AIs are used in the legal and ethical manner required with confidential information.
Palantir is a polarizing stock. But if you believe in the company's long-term growth opportunity as it relates to artificial intelligence, then there's still time to get in on PLTR stock before it moves much higher.
About Palantir Technologies
Palantir Technologies, Inc engages in the business of building and deploying software platforms that serve as the central operating systems for its customers. It operates under the Commercial and Government segments. The Commercial segment focuses on customers working in non-government industries. The Government segment is involved in providing services to customers that are the United States government and non-United States government agencies.
Read More - Current Price
- $80.55
- Consensus Rating
- Reduce
- Ratings Breakdown
- 2 Buy Ratings, 11 Hold Ratings, 6 Sell Ratings.
- Consensus Price Target
- $41.00 (49.1% Downside)
#6 - CAE (NYSE:CAE)
CAE Inc. (NYSE: CAE) is a mid-cap defense stock that merits consideration. The company has a lofty forward P/E ratio of around 24x earnings. Along with its mid-cap status, that can help explain the short interest, which has increased since August and is keeping CAE stock from rising above a level of support around $20.40.
However, with projected earnings growth of over 29%, analysts are projecting a 67% increase in the company’s stock next year.
How likely is that to happen? It seems more likely now than it did earlier this year. That's because, in October 2023, CAE sold its healthcare business. That consolidates the business into Civil Aviation and Defense and Security. According to the company, the move was being made to allow the company to "allocate capital and resources to secure the many attractive growth opportunities on the horizon in our much larger, core simulation and training markets."
About CAE
CAE Inc, together with its subsidiaries, provides simulation training and critical operations support solutions in Canada, the United States, the United Kingdom, Europe, Asia, the Oceania, Africa, and Rest of the Americas. It operates through two segments, Civil Aviation; and Defense and Security. The Civil Aviation segment offers training solutions for flight, cabin, maintenance, and ground personnel in commercial, business, and helicopter aviation; a range of flight simulation training devices; and ab initio pilot training and crew sourcing services, as well as aircraft flight operations solutions.
Read More - Current Price
- $23.77
- Consensus Rating
- Hold
- Ratings Breakdown
- 1 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $25.00 (5.2% Upside)
#7 - Redwire (NYSE:RDW)
The last defense stock on this list is a penny stock, that is, a stock currently trading for less than $5 per share. Redwire (NYSE: RDW) is a small-cap stock with a market cap of around $184 million. That will only add to the stock's volatility.
Redwire is a stock to watch if you're interested in the space niche. That's because, unlike many of the other companies on this list that operate in many areas, Redwire is, for now, exclusively in the space sector. However, according to McKinsey, this is an area that is growing at approximately 9% annually.
Like many penny stocks, Redwire has volatile movement, has higher than usual short interest and is not widely covered by analysts. Before taking a position, investors should also be aware that, as of November 2023, Redwire is not yet profitable.
Putting that aside, the 3 analysts that do offer a rating give RDW stock a Strong Buy rating with a price target of $7.50, which is 160% higher than the stock's current price.
About Redwire
Redwire Corporation provides critical space solutions and space infrastructure for government and commercial customers in the United States, Europe, and internationally. The company provides avionics and sensors including star trackers, sun sensors, critical for navigation, and control of spacecraft; camera systems; solar array solutions for spacecraft spanning the spectrum of size, power needs, and orbital location; and strain composite booms, coilable booms, truss structures, telescope baffles, and deployable booms to position sensors or solar arrays away from the spacecraft.
Read More - Current Price
- $13.89
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 5 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $10.13 (27.1% Downside)
Just a few months ago, defense stocks were trading near 52-week lows. Today, many of the stocks listed in this presentation are trading near 52-week highs. Much of that growth has occurred since the terrorist attack on Israel.
However, if the current rally in stocks broadens to other sectors, it could pull money out of defense stocks and into other sectors. That could make investors skittish about "chasing" these stocks higher.
That would appear to be short-sighted. The market is still seeking direction, and the long-term outlook for defense stocks is bullish. This may be the beginning of a multi-year bull market in the sector.
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