The war in Ukraine stands on its 113th day, with the country showing defiance, refusing to surrender Sievierodonetsk in the face of Russian aggression. The United States is expected to provide an additional $1 billion in security assistance to Ukraine. Currently, U.S. defense spending is at an all-time high and has reached a proposed $778 billion in 2022, according to ExecutiveGov.
Recently, Finland and Sweden, countries geographically close to Russia, handed in their official letters to join NATO. It is expected that with many American defense contractors at the center of NATO’s framework, adding new members to the defense alliance would benefit U.S. defense contractors. The global arms industry is being dominated by U.S companies, and the geopolitical tension in eastern Europe is expected to ensure this stays this way for some time.
Given this backdrop, the defense stocks Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), The Boeing Company (BA), and Raytheon Technologies Corporation (RTX) might be sound additions to one’s watchlist.
Lockheed Martin Corporation (LMT)
LMT is a security and aerospace company that operates as a researcher, designer, developer, and manufacturer of technology systems, products, and services. The company has four segments: Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space.
On May 10, 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. This collaboration is expected to support LMT’s offset agreement with the Swiss government.
On April 25, the U.S. Marine Corps declared the Initial Operational Capability (IOC) of the CH-53K heavy-lift helicopter, manufactured by Sikorsky, an LMT company. This validates the platform's operational readiness to forward deploy Marines and equipment across the globe, which should benefit the company.
For the fiscal first quarter ended March 27, LMT’s net sales and net earnings came in at $14.96 billion and $1.73 billion, respectively. The company’s EPS stood at $6.44. The total business segment operating margin improved 30 basis points year-over-year to 11.1%.
The consensus EPS estimate of $6.77 for the fiscal quarter ending September 2022 indicates a 206.3% year-over-year increase. Likewise, the consensus revenue estimate for the same quarter of $16.79 billion reflects an improvement of 4.7% from the prior-year period. Moreover, LMT has an impressive surprise earnings history, as it has topped consensus EPS estimates in three out of the trailing four quarters.
The stock has gained 16.5% year-to-date and 20.2% over the past six months to close yesterday’s trading session at $414.10.
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.
On May 17, 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 ability in cash generation.
On April 5, 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 might prove to be beneficial for the company.
NOC’s total operating costs and expenses decreased 5% year-over-year to $7.90 billion in the fiscal first quarter ended March 31. Net earnings and EPS came in at $955 million and $6.10, respectively.
Analysts expect NOC’s EPS to increase 10% year-over-year to $27.29 for the fiscal year 2023. Likewise, Street expects revenue for the same period to improve 4.3% from the prior year to $38.10 billion. In addition, NOC has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 22.3% over the past year and 18.4% year-to-date to close yesterday’s trading session at $458.45.
The Boeing Company (BA)
BA designs, develops, manufactures, and sells commercial jetliners, missile defense, military aircraft, satellites, and launch systems globally. The company operates through four segments: Commercial Airplanes; Defense, Space & Security; Global Services; and Boeing Capital.
On May 25, BA and Ethiopian Airlines announced that the carrier would be expanding its all-Boeing freighter fleet with an order for five 777 Freighters. Earlier on May 19, the company and International Airlines Group (IAG) today an order for a total of 50 737-8-200 and 737-10 airplanes. These orders might add to the company’s revenue stream.
For the fiscal first quarter ended March 31, BA’s net cash provided by investing activities increased 7.3% year-over-year to $2.97 billion. The company’s cash and cash equivalents, including restricted balance, came in at $7.45 billion, up 4.3% from the same period the prior year.
Street EPS estimate for the quarter ending September 2022 of $0.59 indicates a 198.3% year-over-year improvement. Likewise, Street revenue estimate for the same period of $20.39 billion reflects a rise of 33.5% from the prior-year quarter.
The stock has gained 5.1% over the past month and 9.5% intraday to close yesterday’s trading session at $133.72.
Raytheon Technologies Corporation (RTX)
RTX is an aerospace and defense company that provides systems and services for commercial, military, and government customers. The company operates through the broad segments of Collins Aerospace Systems; Pratt & Whitney; Raytheon Intelligence & Space; and Raytheon Missiles and Defense.
On June 1, it was reported that NASA had selected RTX business Collins Aerospace and ILC Dover and Oceaneering for producing its next-generation spacesuit, which astronauts will be able to wear outside the International Space Station. The spacesuit might be profitable for the company.
On May 27, it was announced that Raytheon Missiles & Defense, an RTX business, had been awarded a $624 million U.S. Army contract to produce 1,300 Stinger missiles. Wes Kremer, president of Raytheon Missiles & Defense, said, "The funding will be used to enhance Stinger's producibility in an effort to meet the urgent need for replenishment."
RTX’s net sales increased 3% year-over-year to $15.72 billion in the fiscal first quarter ended March 31. Adjusted income from continuing operations attributable to common shareowners and adjusted EPS came in at $1.72 billion and $1.15, up 25.8% and 27.8% from the prior-year period.
The consensus EPS estimate of $1.12 for the quarter ending June 2022 indicates an 8.7% year-over-year rise. The consensus revenue estimate for the same quarter of $16.61 billion reflects an improvement of 4.9% from the prior-year quarter. RTX has beaten consensus EPS estimates in each of the trailing four quarters.
The stock has gained 10.6% over the past six months and 7.2% year-to-date to close yesterday’s trading session at $92.28.
LMT shares were trading at $408.22 per share on Thursday morning, down $5.88 (-1.42%). Year-to-date, LMT has gained 16.37%, versus a -22.58% 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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