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

Source: Lockheed Martin Corp.
Combine a very volatile and dangerous world with the potential for hot spots to break out in numerous locations, with a promise from the U.S. president to upgrade and increase military spending at home. Then, if you add in huge sales to foreign countries looking to upgrade their military capability, you have the perfect storm for the top aerospace and defense companies.

In a series of new reports, the aerospace and defense team at Merrill Lynch raise their price targets on four companies rated Buy that have absolutely been on fire over the past year since the election, and they look to stay that way. All posted solid earnings, and the positive backdrops for the sector still remain very bright for the rest of 2017 and into next year.

General Dynamics

Like other major defense prime contractors, this company had a very solid year, and it remains one the best ideas at Merrill Lynch in the space. General Dynamics Corp. (NYSE: GD) is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.

Major products include Virginia-class nuclear-powered submarine and Ohio class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker 8-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.

The company reported third-quarter numbers that were above both the Wall Street and Merrill Lynch estimates. While General Dynamics did report slightly soft revenues, strong margins, particularly at Aerospace and Combat Systems, were very positive. The analysts note that considering the visibility in the company’s revenue pipeline, they expect it to trade in line with defense peers instead of a discount, which it currently does.

Shareholders of General Dynamics are paid a 1.76% dividend. The Merrill Lynch price target for the stock was raised to $245 from $225, and the Wall Street consensus target is $224.53. The stock closed Friday’s trading at $204.99 a share.

Lockheed Martin

This is another of the top aerospace and defense stocks to buy, and many on Wall Street expect 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 four principal business segments: Aeronautics, Missiles and Fire Control, Mission Systems and Training, and Space Systems.

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.

While the company reported third-quarter earnings below the consensus and Merrill Lynch estimates, it raised its 2017 earnings outlook. New revenue recognition will reduce 2017 net sales by approximately 2% from current guidance. The analysts are very positive on the free cash flow and record backlog at the company.

Lockheed Martin investors are paid a 2.6% dividend. Merrill lynch raised its price objective to $360 from $335, and the posted consensus target is $328.84. The shares ended last week at $308 apiece.

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.


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.