Three defense stocks to buy while wars rage feature some of the industry giants that “Old Man River” would say each “just keeps rolling along.”
The three defense stocks to buy while wars rage have been beneficiaries of fierce battles taking place mainly in Ukraine following Russia’s invasion of the sovereign borders of its neighbor to the West, as well as a war in the Middle East now centered in Gaza after Hamas militants carried out a murderous Oct. 7 invasion of Israel. Demand in the United States for defense equipment and machinery is on the rise due to its national security doctrine that aims to use military modernization to deter adversaries.
Meanwhile, European countries are boosting their NATO budgets to stay in good standing with the alliance, according to a recent research report by Citigroup. Many defense companies serve both military customers and commercial customers but the biggest demand growth lately is coming from equipment and ammunition needed to counter Russia’s attacks against Ukraine and the concurrent conflict in the Middle East between Israel and Hamas militants.
Three Defense Stocks to Buy While Wars Rage: General Dynamics (GD)
General Dynamics (NYSE: GD), headquartered in Falls Church, Virginia, provides land combat vehicles, weapons systems and munitions, ship construction and repair, and technology products and services. In addition, General Dynamics is a leader in the business aviation industry through its Gulfstream and Jet Aviation subsidiaries. Overall, General Dynamics operates in four main segments: Combat Systems, Aerospace, Marine Systems and Technologies.
The company notched an overall operating margin of 11.0%, with margins of 15% in Aerospace, 14.4% from Combat Systems, 9.5% with Technologies and 7.6% by Marine Systems. Citigroup rates shares of General Dynamics as a “Buy.”
The investment bank recommends building positions in the company due to:
1) An Aerospace segment growth outlook lifted by recent order trends and a backlog that gives earnings upside for the next several years;
2) Marine segment growth prospects and improved margins as the company’s labor force and supply chain normalize post-pandemic;
3) Rising demand for the Combat Systems segment as the United States and its NATO allies prepare plans for increased military spending to deter further land-based conflicts in Europe; and
4) Increasing valuation for defense prime contractors.
Chart courtesy of www.stockcharts.com
Three Defense Stocks to Buy While Wars Rage: Additional Buy Ratings
Citigroup recently boosted its 12-month price target for GD to $320, up from $300, based on a 19x price/earnings (P/E) multiple on its estimates a year from now. However, there are risks that include the business jet industry’s vulnerability to unpredictable shocks that cannot be incorporated into earnings models, such as terrorism and epidemics (COVID/SARS).
“Furthermore, the industry has historically been correlated to economic growth,” wrote Citigroup defense and aerospace analyst Jason Gursky. “The company’s other exposure is the defense market, which is subject to changes in political will, global threats to the U.S. and its allies, the state of the federal budget and the condition of existing U.S. and allied military equipment. General Dynamics shares may materially underperform our price target should the economy enter a prolonged recession that results in decreased business jet orders and flight hours. Shares would also likely underperform to the extent that global peace broke out and DoD budgets were severely cut.”
Louie DiPalma, a defense and aerospace analyst at the Chicago-based investment firm William Blair, also likes General Dynamics as an investment. He currently has an “outperform” rating on the stock.
A third fan of the stock is Jim Woods, a former Army paratrooper who recommends it in his Income Multipliers portfolio to his Successful Investing newsletter subscribers. As a former military man, Woods has a keen interest in defense issues and follows them closely for his Successful Investing subscribers.
Jim Woods, a former U.S. Army paratrooper, co-heads Successful Investing and Fast Money Alert.
Three Defense Stocks to Buy While Wars Rage: L3Harris (LHX)
L3Harris (NYSE: LHX), a Melbourne, Florida-based technology company, defense contractor and information technology services provider, produces command and control systems and products, wireless equipment and other equipment. The company is a “buy” recommendation of Citigroup and has been given a 12-month price target of $245, a P/E multiple that is a 10% discount to the S&P 500.
“The primary company-specific risks include execution on current programs at the margin rates we forecast and the company’s ability to maintain market share on new business,” wrote Citigroup’s Gursky. “We currently expect the company to execute well on its backlog but recognize the global aerospace supply chain has been constrained by the pandemic. Furthermore, we assume the company will continue to win new business and protect its core business.”
More macro risks, Citigroup cited, include: 1) Pandemic-induced supply chain delays that last longer than mid-decade and that hamper the ability of the industrial base to successfully execute on its backlog; 2) A sudden or gradual shift over time toward more dovish security and defense postures by the U.S. and its allies that spur less military spending than expected; and 3) Fiscal austerity measures by the U.S. and its allies, driven partly by economic and political reasons. Other risks feature downward pressure on government spending growth, including for the military, compared to forecast. Conversely, if any of these factors are better than expected, the stock could outperform the price target, Gursky added.
Chart courtesy of www.stockcharts.com
Three Defense Stocks to Buy While Wars Rage: Lockheed Martin (NYSE: LMT)
Lockheed Martin (NYSE: LMT), a Bethesda, Maryland-based defense and aerospace company, received a 12-month price target of $525 and a buy recommendation from Citigroup. The company resulted from a 1995 combination between Lockheed Corporation and Martin Marietta Materials, Inc.
In its current form, Lockheed Martin focuses on defense, space, intelligence, homeland security and information technology. The company operates the following business segments—Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS) and Space.
Management recently laid out the case that margins are likely to trough in 2024 and drift toward 11%-plus over time, driven largely by product mix, Citigroup wrote in a recent research note. The loss-making classified contract at Lockheed Martin’s MFC business will be a tailwind in 2025, i.e., lower forward loss charges, while the rest of the margin accretive MFC portfolio is likely to grow faster than the remainder of the company. Further, new awards across the company better reflect the current cost environment and should produce margins higher than pre-pandemic backlog, according to the research note.
Chart courtesy of www.stockcharts.com
Retired Pension Fund Chairman Likes Defense Funds as an Alternative
Bob Carlson, a former pension fund chairman who heads the Retirement Watch investment newsletter, suggested that investors consider exchange-traded funds (ETFs) focused on aviation and defense. Many of the investments Carlson recommends in his Retirement Watch newsletter feature ETFs.
Bob Carlson, who heads Retirement Watch, answers questions from Paul Dykewicz.
Geopolitical Risk Rises in Rafah
President Biden said he supports a new ceasefire proposal in Gaza that would include the release of the hostages taken from Israel by Hamas militants its brutal raid on Oct. 7. The three-part proposal calls for a six-week ceasefire with the Israel Defense Forces (IDF) pulling back from populated areas of Gaza.
There further would be increased humanitarian aid, as well as an exchange of some hostages for Palestinian prisoners. The end goal would be a permanent “cessation of hostilities” and a major reconstruction plan for Gaza. However, the United States incurred a severe setback when a $300 million pier quickly erected by the U.S. military to disperse desperately needed food, liquids, medicine and other aid to civilians in Gaza broke apart amid rough seas.
The ceasefire proposal follows the chief prosecutor of the world’s top war crimes court announcing on Monday, May 20, that he is seeking arrest warrants for top leaders of Israel and Hamas for “crimes” committed during their nearly eight-month war. Israel’s Prime Minister Benjamin Netanyahu, his Defense Minister Yoav Gallant and Hamas leaders Yehia Sinwar, Mohammed Deif and Ismail Haniyeh. each was accused of war crimes, along with crimes against humanity, in Gaza and Israel, respectively.
Netanyahu called the prosecutor’s accusations against him a “disgrace,” and an attack on the Israeli military and all of Israel. He vowed at that time to press ahead with Israel’s war against Hamas and keep seeking the freedom of the hostages taken during an Oct. 7 attack against Israel.
Israel is trying to find and destroy an extensive tunnel system in neighboring Gaza that has been used to store weapons, as well as hide the Hamas leaders and militants who were responsible for the Oct. 7 attack in Israel that killed an estimated 1,200 people and took 240 hostages into Gaza. The battle now has extended into Rafah, where Hamas militants have positioned themselves in the midst of a large civilian population that heightens the fallout to human life.
The Gaza Ministry of Health estimates that more than 35,000 Hamas fighters and Palestinian civilians have lost their lives since the war began Oct. 7.
Russia’s Push Forward in Ukraine Causes Western Resistance
Russian forces keep attempting to break through the border area near Kharkiv, Ukraine’s second largest city. However, Western allies of Ukraine are starting to relax restrictions on the use of weapons they supply to Ukraine.
With Ukraine forces outnumbered and outgunned, Russia’s stepped up attacks caused Western leaders to acknowledge that Ukraine must be allowed to fire at military targets in the invaders’ territory to help protect their civilian population.
Russia’s leaders have adopted a “meat grinder” war strategy of sending overwhelming waves of soldiers forward to wear down Ukrainian forces and expose their locations to kill as many of the defenders as possible. An overall death toll of more than 50,000, estimated by the BBC, is eight times higher than the only official public acknowledgement of fatality numbers released by Russia in September 2022.
The three defense stocks to buy while wars rage are benefitting from strong demand amid ongoing military conflicts. Investors who want to profit traditionally have found protection from defense stocks when demand for their products is surging, as it is now.
Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Special Sale! Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for reduced pricing on multiple-book purchases.
