With Defense Budgets Ready to Grow, 3 Stocks Could Be Winners

May 18, 2015 by 247lee

These days, most Americans and most investors are well aware we live in a dangerous world. After years of flat to lower U.S. Department of Defense budgets, that may be changing soon. In a new report, UBS estimates that the defense prime contractors will be growing at a low single-digit compounded annual growth rate over the next few years on slightly higher Defense Department budgets.

With Defense Department cash outlays expected to be released on June 10, investors have a chance to buy some of the top stocks that may benefit from a heavy exposure to government spending in advance of that date. The UBS team are very positive on three stocks, which are rated Buy.

General Dynamics

This company, like other major defense prime contractors, had a very solid year, and it makes the list at UBS as a top pick stock to buy. General Dynamics Corp. (NYSE: GD) is a worldwide aerospace and defense company with more than 96,000 employees worldwide. It operates through four business groups: Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. The U.S. government is its largest customer, which could continue to bode well since Congress changed hands.

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General Dynamics stock has awarded its investors with returns of about 160% in the past decade. The company pays regular dividends and has a share repurchase plan in place. This is an outstanding stock for long-term growth portfolios.

General Dynamics investors are paid a 2% dividend. UBS has a whopping $163 price target, while the Thomson/First Call consensus target is lower at $159.20. Shares closed Friday at $140.11.

Huntington Ingalls

This lesser known defense name also has a rating of Buy at UBS and is its other top pick stock. Huntington Ingalls Industries Inc. (NYSE: HII) designs, builds, overhauls and repairs ships primarily for the U.S. Navy and Coast Guard. It offers nuclear-powered ships, such as aircraft carriers and submarines, and non-nuclear ships, including surface combatants, expeditionary warfare/amphibious assault, coastal defense surface ships, and national security cutters, as well as engages in the refueling and overhaul, and inactivation of nuclear-powered ships.

The company reported first-quarter results recently that missed analysts’ expectations on both earnings and revenues. The stock sold off pretty dramatically, giving investors with a long-term view an outstanding entry point.

Huntington Ingalls investors are paid a 1.3% dividend. UBS has a $158 price target, and the consensus target is lower at $140.67. The stock closed Friday at $122.90.

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United Technologies

This is another diversified company with large government contract exposure. United Technologies Corp. (NYSE: UTX) is an industrial company that provides high-technology products and services to aerospace industries and building systems worldwide. Its segments are UTC Climate, Otis, Controls & Security, UTC Aerospace Systems, Pratt & Whitney and Sikorsky. Since peaking in late February, the stock has rolled over and not acted well. Many Wall Street analysts believe the company is strategically positioned to benefit from two megatrends in the long term: urbanization and commercial aerospace.

The company announced in March plans to spin off or sell its Sikorsky Helicopters unit. From United Technologies perspective, divesting Sikorsky makes a lot of sense as they are primarily an aircraft engines, systems and components maker with a strong push towards commercial aviation segments, particularly the aftermarket. Sikorsky is a platform prime contractor whose core strength is in military markets. Many have thought that spinning the company off makes sense for shareholders.

United Technologies shareholders are paid a solid 2.2% dividend. The UBS price target is set at $136, and the consensus target is lower at $133.38. Shares closed Friday at $118.49.

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With all the chatter of the sequester two years ago long since off the table, investors looking to add defense positions to portfolios may be able to take advantage of recent selling to buy these stocks. With the change in the Congress fully in place now, it is very possible the defense spending stays solid and goes higher.