Why Defense Stocks Are Selling Off Ahead of Syria Military Action

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When nations go to war, the so-called military industrial complex is generally considered to be the real winner when it comes to the economic side of the equation. Warfare is a very costly business, and all of the advanced munitions, weapons, monitoring, and defense equipment seems to keep ramping up in costs. With the markets spooked about the winds or war not pointing to Syria after its obvious use of chemical or biological warfare on its own citizens, then why on earth are the defense stocks doing so poorly?

First and foremost, investors are taking some money off of the table in stocks. We think there is more to this drop than mere profit taking and portfolio protection. The defense sector is almost entirely dependent upon the good graces and open pocketbook of the United States government and its allies, so another serious risk of a government shutdown or spending halt going into the debt ceiling debate could have an adverse impact on military spending.

A market sell-off on its own is currently no good enough reason to sell defense stocks if we are going to start dropping bombs, sending in targeted missiles, and spending millions and millions to be the eyes and ears in the sky. Even if we get around the budget and debt ceiling issues, perhaps the real risk is that defense stocks are fully priced or close enough to fully priced according to Wall Street analysts. The Iran risk is always present, but Afghanistan is winding down and Iraq is by and large in the past.

Alliant Techsystems (NYSE: ATK) is the largest maker of bullets. Its stock is down even more, with a 3.7% drop down to $97.85 in late Tuesday trading. This stock won from the gold rush in bullet hoarding and possibly as a doomsday prepper stock as its 52-week range is $48.00 to $103.77. According to Thomson Reuters, its consensus analyst target is $101.82 and the highest target is $121.00. Its media price target is slightly higher at $104. If we are not going to put boots on the ground in Syria, then waves and waves of new bullet orders are not going to be coming.

The Boeing Company (NYSE: BA) has a lot of defense exposure, but it is perhaps more dependent upon its commercial plane orders as of now. Its shares are down 2.1% at $103.32 in late Tuesday trading and its 52-week trading range is $69.03 to $109.49. According to Thomson Reuters, its consensus analyst target is $122.59 and the highest target is $135 for its stock.

General Dynamics Corp. (NYSE: GD) is down the least of defense stocks with a late-Tuesday drop of 1.4% at $83.08 against a 52-week trading range of $61.70 to $87.85. According to Thomson Reuters, its consensus analyst target is $95.80.

Lockheed Martin Corporation (NYSE: LMT) is down 1.5% at $123.25 in late Tuesday trading against a 52-week trading range of $85.88 to $126.73. According to Thomson Reuters, its consensus analyst target is $127.13 and the highest target is $149.00. The issue to consider is that the median price target is actually $125, so the value concern at $123 or $124 is more pressing.

L-3 Communications Holdings Inc. (NYSE: LLL) is down by about 1.6% at $90.80 in late afternoon trading on Tuesday. its 52-week range is $68.72 to $94.32 and the consensus price target is $94.64.

Raytheon Co. (NYSE: RTN) is down 2.2% at $75.33 in late Tuesday trading against a 52-week trading range of $52.24 to $77.93. According to Thomson Reuters, its consensus analyst target is $74.63 and the highest target is $91.00. Its media price target is above the consensus at $77 but that still doesn’t leave much room for implied upside.

Another serious issue is that perhaps the targeting of Syria just will not be that aggressive. it is hard to find anyone in America and elsewhere who is for allowing a regime to use chemical or biological weapons in its own people or its enemies. That being said, most of the public does not want to support yet another war in yet another new country.

It is quite possible that targeted military action into Syria could bring almost no significant boost worth noting to the defense sector. Here are some statistics for Syria according to the CIA World Factbook:

  • Population 22,457,336 (July 2013 est.)
  • Labor Force 5.327 million (2012 est.)
  • Unemployment 18% (2012 est.)
  • GDP $107.6 billion (2011 est.) on purchasing power parity, ranked #69 globally
  • Public Debt 52.2% of GDP (2012 est.)
  • Industrial production projected to be -36% in 2012
  • Export partners: Iraq 55.9%, Saudi Arabia 9.3%, Kuwait 6.1%, UAE 5.3%, Lebanon 4.2% (2012)
  • Import partners: Saudi Arabia 21.2%, UAE 10.4%, Iran 7.7%, China 7%, Iraq 6.3%, Ukraine 6.3%, Egypt 4.3% (2012)
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