One thing that President Trump campaigned on, and his followers were very receptive to, was rebuilding our military strength, which has waned in recent years. With the release recently of the first budget from the new administration, constituents should be glad to know that the request from the president came in at $639 billion for defense, which was above most Wall Street estimates of $620 billion.
In a new Merrill Lynch research report, the firm’s outstanding Defense team, note that one of the positive surprises is a budget request submitted by the Navy for a second Virginia class submarine. That and just the overall size of the request from the administration are seen as very positive for the sector.
We focused on five Buy-rated stocks that Merrill Lynch sees as big beneficiaries of the latest proposed budget.
This is an under-the-radar stock with solid upside potential. BWX Technologies Inc. (NYSE: BWXT) primarily supplies U.S. submarines and carriers with naval nuclear reactors and associated nuclear fuel and refueling services, as well as other nuclear components. The Merrill Lynch analysts see the company as a significant beneficiary of U.S. investment to support a 355-ship Navy.
This is also the first of three companies that the analysts see as having a direct benefit from the new request for the second Virginia-class submarine. The company also recently reported strong first-quarter results, with revenues up more than 17% year over year.
The Merrill Lynch price target for the stock is $55, and the Wall Street consensus target is $55.83 per share. The stock closed Wednesday at $48.27 a share.
This company, like other major defense prime contractors, has had a very solid year and remains one the best ideas at Merrill Lynch in the space. General Dynamics Corp. (NYSE: GD) is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.
Major products include Virginia-class nuclear-powered submarine and Ohio class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker 8-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.
The company reported stunning first-quarter earnings that were well above the analysts’ consensus estimate. The earnings beat was driven by better than expected margins and lower taxes.
Shareholders in General Dynamics are paid a 1.68% dividend. Merrill Lynch has a $225 price target on the shares, and the consensus target price is $210.06. Shares closed on Wednesday at $199.98 apiece.