Merrill Lynch Raises Price Targets on 4 Top Defense Stocks to Buy

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Northrop Grumman

This company was ranked as one of the top five defense contractors by sales last year. Northrop Grumman Corp. (NYSE: NOC) 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 Information Systems segment offers advanced solutions for Department of Defense, national intelligence and 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 company posted solid quarterly results and the analysts said this in their report:

Northrop Grumman reported third quarter diluted EPS from continuing operations of $3.68, above the Merrill Lynch estimates of $2.85. Organic growth in the quarter was 6%. The beat was driven by a tax benefit and a favorable contract adjustments. Management raised 2017 EPS guidance to $12.90-13.10 (versus prior $12.10-12.40) on sales of about $25.5 billion (versus the prior low of $25 billion).

Northrop Grumman shareholders are paid a 1.35% dividend. The $305 Merrill Lynch price target was raised to $350, while the posted consensus target is $306.24. The shares closed trading on Friday at $297.66.

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 year, and with 31% of total sales from international, the prospects remain very positive. Many cite the Patriot Missile deal signed with Poland as a good example, which could propel 2018 earnings.

The company reported outstanding results, with third quarter earnings per share from continuing operations above the Merrill Lynch estimate. Revenue was up more than 4%, which was above the Merrill Lynch estimate. And free cash flow generation was $239 million.

Raytheon shareholders are paid a 1.75% dividend. The Merrill Lynch price objective was lifted to $220 from $200. The Wall Street consensus target is $199.56, and the shares closed Friday at $180.28.

The huge foreign sales contracts being acquired, combined with a campaign promise to boost our own military, bode well for the top companies in the sector. These stocks have had massive runs, and it may make sense to scale buy shares over a certain period, hoping that the shares can pullback some from current lofty levels.