With talk of deficits, debt ceilings, and potential budget cuts
dominating the U.S. political landscape in recent weeks, a good
deal of fear and uncertainty has been swirling around stocks of
companies that could be impacted if the government starts slashing
One such area: aerospace & defense firms. The defense budget
has come under great scrutiny lately as Congress tries to claw away
at the $1.4 trillion U.S. budget deficit. That -- along with
investors' increased appetite for riskier stocks amid the Federal
Reserve's money-printing binge -- has helped keep the shares of
many A&D companies trading on the cheap.
This week, however, the House Appropriations Committee passed a
defense budget that cut President Obama's spending request less
than some had feared, good news for defense-related companies.
What's more, some aerospace & defense firms get less revenue
from the U.S. government than you might think, either because of
diversified product lines or because they earn big chunks of
revenues from other governments overseas. Some others that do rely
heavily on the U.S. government are just flat-out cheap enough to
merit interest. So the cloud hovering over this sector may well be
creating nice buying opportunities.
Of course, not all A&D stocks are created equal. So to find
the best of the bunch, I recently used my Guru Strategies -- each
of which is based on the approach of a different investing great --
to scan through the sector and see which of these stocks look most
attractive right now. One is General Dynamics (
), which I wrote about earlier this month, and which still gets
approval from my Peter Lynch- and Joel Greenblatt-inspired models.
But here are some that are also near the top of the list.
Raytheon Company (RTN):
Massachusetts-based Raytheon provides state-of-the-art electronics,
mission systems integration, and other products and services used
in a variety of communications, command, and intelligence systems,
and also provides mission support services. The
$17-billion-market-cap firm has taken in more than $25 billion in
sales in the past year.
Raytheon gets strong interest from the model I base on the
writings of mutual fund great Peter Lynch. It considers the firm a
big, steady "stalwart", because of its high sales and moderate
14.5% long-term earnings per share growth rate. (I use an average
of the three-, four-, and five-year EPS growth rates to determine a
long-term rate.) Lynch famously used the P/E/Growth ratio to find
stocks with good growth that were selling on the cheap, adjusting
for dividend yield in the case of big stalwarts like Raytheon. When
we divide Raytheon's 10.3 price/earnings ratio by the sum of its
3.5% yield and 14.5% growth rate, we get a yield-adjusted P/E/G of
0.57, which easily comes in under this model's 1.0 upper limit.
Another reason the Lynch-based model likes Raytheon: the firm's
reasonable 36.4% debt/equity ratio.
Rockwell Collins Inc. (
Based in Iowa, Rockwell makes electronics used in the
communications and aviation industries. Its systems transmit almost
70% of all U.S. and allied military communications, but it also has
customers in the commercial arena.
Rockwell ($9.2 billion market cap) gets strong interest from my
Warren Buffett-inspired strategy. This approach looks for firms
with lengthy histories of increasing annual EPS, low debt, and high
returns on equity (a high ROE is a sign of the "durable competitive
advantage" Buffett is know to seek in his buys). Rockwell's EPS
have decline in the past two fiscal years, but prior to that it had
upped EPS in every year of the past decade, so the Buffett model
sees the recent dips as more of a buying opportunity than a sign of
long-term trouble. The company also has less debt ($509 million)
than annual earnings ($585 million). And, its average ROE over the
past decade is 33.6%, more than doubling this model's 15%
L-3 Communications Holdings, Inc. (
New York City-based L-3's offerings range from Intelligence,
Surveillance and Reconnaissance to secure communications to
training and simulation to aircraft modernization and maintenance.
The $8.7-billion-market-cap firm has taken in more than $15.6
billion in sales in the past year.
L-3 is another "stalwart" according to my Lynch-based model,
thanks to its high sales and 14.9% long-term EPS growth rate. And
the strategy gives it high marks. A big reason: It has a 0.58
yield-adjusted P/E/G ratio, a sign that it's a bargain at its
FLIR Systems, Inc. (
FLIR makes infrared cameras, night vision products, and thermal
imaging systems. Its products are used by government agencies, as
well as commercial and industrial firms. The 33-year-old company
has a $5.3 billion market cap, and has taken in about $1.5 billion
in sales in the past 12 months.
Oregon-based FLIR gets strong interest from my Buffett-inspired
model, which likes that the firm has upped EPS in every year of the
past decade and has no long-term debt. FLIR has also averaged a
21.4% return on equity over the past ten years, another reason this
model is high on it.
National Presto Industries (
National Presto, which makes 40-millimeter ammunition, precision
mechanical and electro-mechanical assemblies, and medium-caliber
cartridge cases, gets about half its revenues from defense-related
endeavors. But it also has one of the more intriguingly diversified
product lines you'll ever find. Its two other business segments:
Housewares/Small Appliances, which includes the manufacturing of
pressure cookers and kitchen appliances; and Absorbent Products,
which makes adult diapers used to deal with incontinence.
Wisconsin-based Presto ($675 million market cap) gets high marks
from my Lynch-based model, which considers it a "fast-grower"
because of its 26.8% long-term EPS growth rate (based on the
average of the four- and five-year EPS growth rates). The stock's
11.0 P/E ratio and that growth rate make for a stellar 0.41 P/E/G.
In addition, Presto has no long-term debt, a great sign.
I'm long RTN and FLIR.