As if the defense and aerospace investors needed more good news, the U.S. State Department recently approved a possible foreign military sale of the Terminal High Altitude Area Defense System (THAAD) to Saudi Arabia. Some top analysts on Wall Street feel that the total package could reach a stunning $15 billion. The deal is part of May 2017 agreement that was made following the president’s visit to the country.
In new research report, Deutsche Bank analyst Myles Walton notes that while the deal still has to proceed through a 30-day congressional review period, the overall size and components are impressive. This was noted in the report:
The THAAD missile defense system, is a land-based system used to intercept and destroy ballistic missiles during the terminal phase of flight and consists of four components: The launcher, interceptors (8 per launcher), radar (AN/TPY-2), and fire controls.
Two top companies are expected to get the majority of the deal, and both are Buy rated at Deutsche Bank. Her we also look at two other top stocks that have big upside potential as well.
Lockheed Martin
This is one of the top aerospace and defense stocks to buy, and many on Wall Street are expecting a very solid continuation of U.S. and foreign defense spending. Lockheed Martin Corp. (NYSE: LMT) researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and services. It also provides a wide range of defense electronics products and IT services.
The company operates in five principal business segments: Aeronautics, Missiles and Fire Control, Mission Systems and Training, Space Systems, and Information Systems & Global Solutions.
Being the Pentagon’s prime contractor, Lockheed Martin offers a diverse portfolio of global aerospace, defense, security and advanced technologies. Its leveraged presence in the Army, Air Force, Navy and IT programs guarantees a steady inflow of follow-on orders, not only from the U.S. government but also from a large number of foreign allies of the nation.
Lockheed Martin is expected to be the prime contractor on the Saudi deal, and should get two-thirds of the revenue.
Investors in Lockheed Martin receive a 2.52% dividend. The Deutsche Bank price objective for the shares is $340, and the Wall Street consensus target price is $317.89. The stock closed Wednesday at $318.59 a share.
Raytheon
This company has a diversified mix of businesses and remains a favorite on Wall Street. Raytheon Co. (NYSE: RTN) is an industry leader in defense, government electronics, space, information technology and technical services. The company operates in four principal business segments: Integrated Defense Systems, Intelligence, Information and Services, Missile Systems, and Space and Airborne Systems.
Top Wall Street analysts feel that the company could be one of the biggest winners as the global threat environment has been heightened substantially this past year, and with 31% of total sales from international sources, the prospects remain very positive. Many cite the Patriot Missile deal signed with Poland as a good example that could propel 2018 earnings.
Raytheon is expected to be the key supplier for the huge Saudi deal, which suggests it will receive a third of the revenue.
Raytheon shareholders are paid a 1.7% dividend. Deutsche Bank has a $210 price objective for stock, while the posted consensus price target $196.44. The shares closed Wednesday at $187.22 apiece.
24/7 Wall St.Northrop Grumman
This top defense company is also rated Buy at Deutsche Bank and looks like outstanding defense play as well. Northrop Grumman Corp. (NYSE: NOC) was ranked as one of the top five defense contractors by sales last year. It provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR and logistics and modernization to government and commercial customers worldwide. The Aerospace Systems segment designs, develops, integrates and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems.
The company’s Information Systems segment offers advanced solutions for Department of Defense, national intelligence, federal civilian, state, international and commercial customers. This segment provides products and services primarily in the fields of command and control, communications, cyber, air and missile defense, intelligence processing, civil security, health information technology, and government support systems.
The Technical Services segment provides logistics, modernization and sustainment services, as well as other advanced technology and engineering services, including space, missile defense, nuclear security, training and simulation services.
The analysts see the aerospace divisions driving sales and also note the ramp-up in the F-35 fighter production. They also cite the continued B-21 development work as a positive despite the margin headwinds that many feel are factored in.
Northrop Grumman shareholders are paid a 1.36% dividend. The $325 Deutsche Bank price target compares with the consensus price target of $288.11, as well as the most recent closing price of $295.19.
24/7 Wall St.L3 Communications
This is the other Buy-rated Deutsche Bank defense pick with big upside potential. It is also one stock that many analysts like into the third-quarter earnings. L3 Communications Holdings Inc. (NYSE: LLL) provides aerospace systems and a range of communication and electronic systems and products used on military and commercial platforms in the United States and internationally.
The company operates in three segments: Electronic Systems, Aerospace Systems and Communication Systems. It offers a range of products and services, including components, products, subsystems and systems, as well as related services to military and commercial customers in business areas, including precision engagement and training, power and propulsion systems, aviation products and security systems, sensor systems, warrior systems, and optics, telescopes and precision optical subsystems.
L3 Technologies produces electro-mechanical and mechanical fuzes to support missiles and artillery systems that enable for high-speed and high-accuracy sensors. Raytheon’s AIM-9X Sidewinder missiles bolster L3’s fuzing capabilities. They could see some ancillary revenue from the Saudi deal.
Deutsche Bank has set its price objective at $205. The posted consensus target price is $198.43, and the shares ended Wednesday’s trading at $187.66 apiece.
The huge foreign sales, combined with a campaign promise to boost our own military, bode well for the top companies in the defense and aerospace sector. The stocks have had massive runs, and it may make sense to scale-buy stock over a certain period, hoping that the shares can pullback some from current lofty levels.
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