Protect Your Portfolio With These 3 Outperforming Defense Stocks

The heightened military spending globally due to the Russia-Ukraine war is creating lucrative opportunities for the defense sector. Given the solid prospects of the defense market, we think outperforming defense stocks Textron (TXT), Lockheed Martin (LMT), and Northrop Grumman (NOC) might be solid additions to one’s portfolio amid the ongoing market turbulence. Keep reading...

According to the Stockholm International Peace Research Institute (SIPRI), global military spending topped $2 trillion for the first time. Last year was the seventh consecutive year that spending rose. The United States accounts for nearly 40% of global military spending.

Moreover, as the Russia-Ukraine war rages on, the U.S. House of Representatives Armed Services Committee on Wednesday supported a proposal to increase spending for the Department of Defense by $37 billion on top of the proposed $773 billion, which indicates a Pentagon budget of at least $810 billion next year.

The war has been creating growth opportunities for U.S. weapon manufacturers and will likely keep defense contractors busy for some time. In addition, the global aerospace and defense industry is forecasted to reach $1.05 trillion in 2026 at a CAGR of 8.5%.

Given this favorable backdrop, the defense stocks Textron Inc. (TXT), Lockheed Martin Corporation (LMT), and Northrop Grumman Corporation (NOC) might be solid buys to navigate the current market volatility. These stocks have outperformed the S&P 500 declines of 11.5% over the past year.

Textron Inc. (TXT)

TXT operates as an aircraft, defense, industrial, and finance business. The company offers business jets, military and commercial helicopters, unmanned aircraft systems, and financing services.

In May, Textron Aviation, a TXT company, reported the first delivery of the Cessna Skycourier twin utility turboprop to FedEx Corporation (FDX). In addition to the initial order, FedEx Express has options for 50 more SkyCourier aircraft, which might benefit TXT.

In April, TXT announced the closing of its acquisition of PIPISTREL d.o.o., PIPISTREL VERTICAL SOLUTIONS d.o.o. and PIPISTREL ITALIA S.R.L., known collectively as Pipistrel, an electric-powered aircraft. This might enhance the company’s operative capability.

TXT’s total revenues increased 4.2% year-over-year to $3 billion in the first quarter ended April 2. Its net income grew 12.9% from the year-ago value to $193 million. The company’s EPS increased 17.3% from the prior-year quarter to $0.88.

The consensus EPS estimate of $1.01 for the fiscal third quarter (ending September 2022) indicates an 18.9% improvement year-over-year. The consensus revenue estimate of $3.38 billion for the same quarter reflects an increase of 13% from the same period last year. The company has an impressive earnings surprise history as it surpassed the consensus EPS estimates in three of the trailing four quarters.

The stock has gained 1.8% over the past five days but has decreased 23.6% year-to-date to close its last trading session at $58.99. It has declined 10.1% over the past year.

TXT’s POWR Ratings reflect this promising outlook. The company has an overall rating of A, which translates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

TXT is rated a B in Value and Quality. Within the Air/Defense Services industry, it is ranked #2 of 77 stocks.

To see additional POWR Ratings for Growth, Momentum, Stability, and Sentiment for TXT, click here.

Lockheed Martin Corporation (LMT)

LMT is a security and aerospace company that primarily serves the U.S. government and foreign military sales. The company operates through four broad segments Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space.

On June 23, LMT declared a third-quarter dividend of $2.80 per share, payable to shareholders on September 23. This reflects upon the company’s shareholder return ability.

In May, Mercury Systems Inc. (MRCY), a commercial technology company serving the aerospace and defense sector, and LMT announced that they had signed an agreement to collaborate on developing and manufacturing new sensor processing technologies at Mercury’s Geneva, Switzerland facility. This collaboration is expected to support LMT’s offset agreement with the Swiss government.

In the first quarter ended March 27, LMT’s net sales came in at $14.96 billion. Its operating profit was $1.93 billion, while its net income stood at $1.73 billion. The company’s EPS came in at $6.44. The cash and cash equivalents balance came in at $1.88 billion.

Analysts expect LMT’s revenue for the fiscal year 2023 to be $67.91 billion, indicating 2.9% year-over-year growth. The company’s EPS for the same year is expected to increase 6% from the prior year to $28.47. In addition, LMT has topped consensus EPS estimates in three out of the trailing four quarters, which is impressive.

LMT has gained 8.6% over the past year and 16.9% year-to-date to close its last trading session at $415.45.

It is no surprise that LMT has an overall B rating, which translates to Buy in our POWR Rating system. The stock has a B grade for Sentiment and Quality. In the Air/Defense Services industry, it is ranked #6.

Beyond what we’ve stated above, we have also given LMT grades for Growth, Value, Momentum, and Stability. Get all the LMT ratings here.

Northrop Grumman Corporation (NOC)

NOC, operating through the segments of Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems, provides aircraft systems for tactical intelligence, weapon and mission systems for the military, radar, electro-optical/infrared, and acoustic sensors.

In May, NOC declared a quarterly dividend of $1.73 per share on its common stock, payable to shareholders on June 15. This exhibits a 10% increase in its quarterly dividend and reflects upon the company’s cash generation ability.

In April, NOC and AT&T Inc. (T) announced that they had entered into a collaboration agreement to research and develop a digital battle network to support the U.S. Department of Defense (DoD), leveraging T’s 5G technology and NOC’s mission systems. This collaboration might prove to be profitable for the company.

For the first quarter ended March 31, NOC’s total sales were $8.80 billion. Its operating income was $897 million. The company’s net earnings stood at $955 million, while its EPS was $6.10. Total operating costs and expenses decreased 5% year-over-year to $7.90 billion.

Street EPS estimate for the fiscal year 2023 of $27.30 reflects a rise of 10% year-over-year. Likewise, Street revenue estimate for fiscal 2023 of $38.10 billion indicates an improvement of 4.3% from the prior year. Additionally, NOC has topped consensus EPS estimates in each of the trailing four quarters.

Over the past year, NOC’s stock has gained 23.1% and 18.5% year-to-date to close its last trading session at $458.61.

NOC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our POWR Rating system.

NOC has a B grade for Stability. It is ranked #11 in the Air/Defense Services industry. Click here to see the additional POWR Ratings for NOC (Growth, Value, Momentum, Sentiment, and Quality).

TXT shares were trading at $57.85 per share on Thursday afternoon, down $1.14 (-1.93%). Year-to-date, TXT has declined -24.77%, versus a -20.20% rise in the benchmark S&P 500 index during the same period.

About the Author: Anushka Dutta

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.


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