Sequestration and spending cuts were expected to adversely
affect the performances of the defense behemoths that explicitly
provide products and services to the U.S. Department of Defense.
In reality, the defense players are doing extremely well despite
the fear of Damocles' sword hanging over defense budgets and
Per the sequestration legislation that came into effect from Mar
1 this year, spending on nearly every US defense budget item will
be slashed by 10%. Yet the five biggest defense firms --
Northrop Grumman Corp.
Lockheed Martin Corp.
General Dynamics Corp.
The Boeing Company
) -- rallied 46%, 42.4%, 41.8%, 47.9% and 31.2%, respectively,
over a one-year period, as of Jul 24.
The companies have been posting strong results during the ongoing
earnings season, with increased expectations, share buybacks and
dividends. The bullish trends may be attributed to complex
military programs being awarded to these companies much before
the across-the-board spending cuts came into force.
The most notable programs include
Huntington Ingalls Industries, Inc.'
) building of nuclear-powered aircraft carriers at its Newport
News Shipbuilding yard in Virginia, Boeing's KC46A air tanker
refuelling aircraft and Lockheed Martin's F35 joint strike
fighter. The stream of contract wins has largely left these
stocks unscathed despite forebodings on the contrary.
Bet on These Top Three Players
If given to choose the top three defense stocks, we would suggest
the following names: Lockheed Martin,
Spirit AeroSystems Holdings Inc.
) and Boeing. While Boeing seems pricey at current levels, both
Lockheed Martin and Sprint AeroSystems are undervalued right now.
All three stocks sport a Zacks Rank #2 (Buy).
The world's largest stand-alone defense contractor, Lockheed
Martin, whose 82% of sales come from the U.S. government, is
trading at 12.5x the estimate for 2013, a 16.5% discount to the
peer group average of 15.0%. Based on its strong operational
performance, analysts expect a solid long-term earnings growth
rate of 6.2%.
To date, Lockheed Martin with its industry-leading F-16, F-22,
and F-35 fighter jet models continues to receive funds from the
DoD. It also includes an additional $8.4 billion in funding this
year for the development its turbulent F-35 joint strike fighter,
a program that is seven years behind schedule.
Again, headquartered in Wichita, Kansas, Spirit AeroSystems is
expected to witness earnings growth of 793.0% for this year and
18.8% for 2014. The stock is moving for about 11.2x the estimate
for 2013, a 8.6% discount to the peer group average of 12.3x. Its
price-to-book (P/B) ratio of 1.7 suggests that the stock is still
undervalued. Our views are supported by the company's long-term
expected earnings growth of 12.5%.
Meanwhile, the share price of Boeing seems to be shock resistant
despite several glitches with its 787 Dreamliner. If we set apart
the second quarter earnings beat, the company also raised its
top-line expectation for the year. Despite reporting flat
revenues at $8.2 billion at Boeing Defense, Space & Security
unit owing to the sequester, operating margin expanded 40 basis
points to 9.5%.
Shares of Boeing are going for about 17.2x the estimate for 2013.
Though it looks a bit pricey, the investors may be willing to pay
more given its solid fundamentals and its long-term expected
earnings growth of more than 10%.
BOEING CO (BA): Free Stock Analysis Report
GENL DYNAMICS (GD): Free Stock Analysis
HUNTINGTON INGL (HII): Free Stock Analysis
LOCKHEED MARTIN (LMT): Free Stock Analysis
NORTHROP GRUMMN (NOC): Free Stock Analysis
RAYTHEON CO (RTN): Free Stock Analysis Report
SPIRIT AEROSYS (SPR): Free Stock Analysis
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