Aerospace & Defense

Credit Suisse Shows Top Defense Stock Picks

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Defense contractors met with U.S. Department of Defense officials and members of Congress last week at a conference sponsored by Credit Suisse. On Monday morning, the bank’s analysts released a brief report on the meeting and the state of the defense business.

Predictably, perhaps, Defense Department and congressional speakers argued for more money for defense. The request for fiscal year 2016 includes $534 billion of base funding and $51 billion for overseas operations, which the speakers characterized as the “minimum” needed for national security.

A top priority is to avoid sequestration of defense funds, with most attendees hoping for a short-term agreement for one year as of the third quarter.

At highest risk, according to the Credit Suisse report, is intelligence, surveillance and reconnaissance (ISR) work, with many of the country’s assets still “stuck in Iraq, Afghanistan and Syria.” The failure of Congress to support further base closures is also “diverting $2B away from needed investments such as EW [electronic warfare], preferred munitions, advanced sensors, and space.” Defense Department officials also noted the “potential deterioration of US technological superiority.”

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Credit Suisse’s analyst reiterated his calls on three U.S. defense firms and one British firm that the bank covers.

Level 3 Communications Holdings Inc. (NYSE: LLL) is the analyst’s top pick, with an Outperform rating and a price target of $154. The consensus price target on the stock is $143.22. At Friday’s closing price of $128.61, the potential upside at the Credit Suisse target is nearly 20% and the stock’s 52-week range is $99.33 to $132.92. Credit Suisse says the company is “cheaper than peers’ [free cash flow] yield valuation and [has the] potential for divestitures of low margin business units.”

The analysts also rate General Dynamics Corp. (NYSE: GD) as Outperform, with a price target of $156. The consensus target is $157.53 and the stock closed at $135.41 on Friday. At the Credit Suisse price target the potential upside is just over 15%. The stock’s 52-week range is $104.22 to $146.13.

The third U.S.-based firm that gets an Outperform rating is Raytheon Co. (NYSE: RTN) on which Credit Suisse has a price target of $115. At last Friday’s closing price of $112.40, the potential upside is about 2.3%. The stock’s 52-week range is $89.17 to $113.36, and the consensus price target is $117.79.

The U.K.’s BAE Systems also garnered an Outperform rating and a price target of 600 pence, offering a potential upside of 10% to its trading price of 540 pence Monday morning.

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