Major defense stocks rallied on Aug 9, following a fresh altercation between the U.S. President Donald Trump and his North Korean counterpart Kim Jong-un. Notably, Trump warned North Korea that if the nation does not refrain from its repeated missiles threats, the U.S. will respond with "fire and fury."
In retaliation, Kim threatened to fire missiles on Guam, a U.S. territory in the Pacific that houses military bases. While rest of the broader market reacted negatively to the escalated geopolitical tensions, defense stocks picked up pace.
However, it is imperative to mention that this cross-border tension between the U.S. and North Korea has not been the only driving force behind the defense stocks' rally. The defense sector has been a big market winner for quite some time now, on the back of Trump's presidential win and a few other factors.
Factors Driving the U.S. Defense Stocks
International terrorist attacks as well as intra-national conflicts giving rise to varied civil wars have boosted the outlook for the U.S. aerospace and defense industry. Also, the 'big' spending promises made by Trump in his budgetary amendments provided an impetus to these stocks.
To be specific, the Pentagon's fiscal 2018 (FY18) budget proposal made in March reflectsa total increase of $54 billion over the current level. Through this proposal, Trump not only repealed Obama's defense sequestration but also made history by proposing the largest one-year increase in the Department of Defense's funding.
In the same month, Trump also proposed to increase the current fiscal's defense budget by $30 billion. In July, the U.S. House passed the FY18 defense policy bill worth $696.5 billion that extensively surpassed Trump's budget request.
Further, rising defense spending by other major regional powers such as Japan and India have bolstered investors' optimism in the industry. Also taking advantage of regional tensions prevailing in the Middle East, U.S. defense majors are expanding their foreign markets rapidly. The recently inked foreign military sales contracts include the arms deal worth $110 billion that Trump signed with Saudi Arabia in May. This deal came up with a potential value of $350 billion over 10 years, involving defense bellwethers like The Boeing Co. BA , Raytheon Company RTN and Lockheed Martin Corp. LMT .
All these factors boosted the stocks of the broader Aerospace sector (a stand-alone sector) to rally 33.4% in the last year, significantly outperforming the S&P 500 index's 12.8% gain.
The Q2 earnings season is in its last leg and the picture so far appears to be quite encouraging. As of Aug 4, of the 90% defense stocks that have reported their quarterly figures in this space, 88.9% have topped earnings estimates, while 66.7% exceeded revenue estimates.
Defense Stocks Soar to New All-Time Highs
This time, the fresh cross-border dispute between the U.S. and North Korea paid off well for defense behemoths - Northrop Grumman Corp. NOC , Lockheed Martin and Raytheon - all of which hit new all-time highs on Wednesday, following Trump's speech. Notably, these companies either manufacture high-end missiles or offer missile surveillance services that have been the main crux of this latest altercation. Banking on the below mentioned bullish trends boasted by these stocks, investing in them seem to be a prudent choice.
Northrop Grumman provides systems, products and solutions to government and commercial customers in the areas of aerospace, mission systems and technology services worldwide. Its cyber solutions offer missile warning and defense systems. Northrop Grumman has a Zacks Rank #2 (Buy).
Both of Northrop's earnings and revenue figures for the second quarter exceeded the Zacks Consensus Estimate. Also, results were impressive on a year-over-year basis, thanks to strong sales growth at the Aerospace segment (read more: Northrop Grumman Tops on Q2 Earnings, Ups' 17 EPS View ). The company's shares rose 1.2% in a single day trading on Aug 9.
The Zacks Consensus Estimate for its current-year earnings increased 1.3% over the last 30 days. The company's share returned 294% in last five years, compared to the broader industry's return of 182.2%, therefore making it a viable investment choice.
Lockheed Martin is the largest defense contractor in the world, which manufactures military aircraft, Joint Light Tactical vehicle, Littoral combat ships and many more alike defense equipments. Among its varied missile programs, notable ones are the Patriot Advanced Capability-3 (PAC-3) and Terminal High Altitude Area Defense (THAAD). Lockheed Martin currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Both of Lockheed Martin's earnings and revenue figures for the second quarter exceeded the Zacks Consensus Estimate. Also, results were impressive on a year-over-year basis. Buoyed by better-than-expected results, the company raised its 2017 guidance (read more: Lockheed Beats on Q2 Earnings, Raises 17' EPS View ). Its shares rose 1.7% in a single day trading on Aug 9.
The Zacks Consensus Estimate for its current year earnings inched up 0.9% over the last 30 days. The company's share returned 232.8% in last five years, compared to the broader industry's return of 182.2%.
Raytheon is one of the largest aerospace and defense companies in the U.S. with a diversified line of military products, including missiles, radars, sensors, surveillance and reconnaissance equipment, communication and information systems, naval systems, air traffic control systems and technical services.Its notable missile system includes the Tomahawk cruise missile, an advanced surface or submarine-launched cruise missile with loitering and network communication capability. Raytheon currently carries a Zacks Rank #3.
Both of Raytheon's earnings and revenue figures for the second quarter topped the Zacks Consensus Estimate. Also, results were impressive on a year-over-year basis. Buoyed by better-than-expected results, Raytheon also raised its 2017 guidance (read more: Raytheon Tops Q2 Earnings & Sales, Raises '17 View ). Its shares rose 1.7% in a single day trading on Aug 9.
The Zacks Consensus Estimate for its current year earnings inched up 0.8% over the last 30 days. The company's share returned 216.3% in last five years, compared to the broader industry's return of 138.3%.
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Northrop Grumman Corporation (NOC): Free Stock Analysis Report Boeing Company (The) (BA): Free Stock Analysis Report Lockheed Martin Corporation (LMT): Free Stock Analysis Report Raytheon Company (RTN): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research