Push To Defeat ISIS Huge In 2017 For Four Top U.S. Defense Companies

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After years of expanding the caliphate they felt they could impose on the Middle East and beyond, the terror group ISIS is finally getting the brutal force that many around the world felt was long overdue. One of the ways the tide has turned is the United States and coalition forces have turned to an accelerating rate of weapons use, especially missiles. Combine that with the president’s gigantic fiscal year 2018 budget request and surge in foreign spending, and the outlook for sustained defense spending increases looks solid.

In a new report from the Defense and Aerospace team at RBC, they note that missile use has jumped dramatically in the fight against ISIS in Iraq and Syria. That, combined with the budget increases and foreign sales, paint a rosy picture for some of the top companies in the firm’s research overview.

They noted this in the report that the pace of weapons releases has been increasing sharply in recent months as the U.S. steps up its level of activity in Operation Inherent Resolve, the ongoing operation against ISIS in Iraq and Syria. Weapons releases for the operation (reported by Air Force Central Command) reached an all-time high in June and have climbed by 57% so far this year in the first half versus the same period of 2016.

Four companies are big players in the missile area, and could be solid buys going forward.

Raytheon

This company has a diversified mix of business and remains a favorite at RBC. Raytheon Company (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.

The RBC analysts believe 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 the international segment, the prospects remain very positive. They cite the Patriot Missile deal recently signed with Poland as a good example that could propel 2018 earnings. RBC said “Raytheon is the most-exposed of the large defense primes as it generates 28% of its sales from its missile systems segment. We see the strength in this short-cycle product category as a likely near-term upside driver for Raytheon, and expect more guidance boosts like the $100 million increase to the 2017 total revenue forecast last quarter from upside in missile systems.

Shareholders are paid a 1.9% dividend. The RBC price objective for the Outperform rated stock is $181, while the Wall Street consensus is posted at $173.47. The shares closed Wednesday at $168.98.

Lockheed Martin

This company is one of the top aerospace and defense stocks to buy, and many on Wall Street are expecting a solid continuation of U.S. and foreign defense spending at the company. Lockheed Martin Corporation (NYSE: LMT) researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and 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 (IS&GS). Lockheed Martin also provides a wide range of defense electronics products and IT services.

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.

The company recently reported strong sales of the firm’s tactical missile, an area that represents 30% of segment sales for its mission and fire control segment. Over the last year, tactical missile sales have risen by a reported $170 million.

Investors are paid a 2.54% dividend. RBC rates the stock Sector Perform and has a $295 price target. The Wall Street consensus price target is posted at $294.15. The shares closed Wednesday at $290.67.

Northrop Grumman

The defense company was ranked as one of the top five defense contractors by sales last year. Northrop Grumman Corporation (NYSE: NOC) provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR, and logistics and modernization to government and commercial customers worldwide. Northrop Grumman’s 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. Its technical services area provides logistics, modernization, and sustainment services; and other advanced technology and engineering services, including space, missile defense, nuclear security, training, and simulation services.

The RBC team sees the aerospace divisions driving sales forward in the second quarter, 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 they believe are factored in.

Shareholders are paid a 1.51% dividend. The RBC price target is $281 and the stock is rated Outperform, while the consensus price target is $265.05. The share closed Wednesday at $264.92.

L3 Communications

This is one of the companies many analysts like when the company is expected to report second-quarter earnings on July 27. 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.

The company offers a range of products and services, including components, products, subsystems, and systems. L3  also offers related services to military and commercial customers in business areas. Those include precision engagement and training, power and propulsion systems, aviation products and security systems, sensor systems, warrior systems, and optics, telescopes, and precision optical subsystems.

The RBC team notes that L3 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.

Investors are paid a 1% dividend. RBC rates the stock Sector Perform with a price objective at $190, while the Wall Street consensus is posted at $185.79. The shares closed Wednesday at $171.96.

With President Trump trying to deliver on his promise to confront and destroy the ISIS forces, and with some strong help from the Iraqi military, the tide appears to have turned against the terror group. Combine that with budget increases, and foreign purchases, and the future for these top companies looks bright for shareholders.