Military

6 Stocks Dominate Defense and Aerospace Sector, All Are Strong Buys

Lee Jackson

Published: September 26, 2018 9:50 am

Last Updated: January 11, 2020 5:19 pm

Regardless of the economy, the defense of our country remains a top priority, no matter who is in the White House or what party controls Congress. In fact, each year the government spends an astonishing $970 billion in defense contracts. For years that money was spread over countless companies, but now six of the top seven top defense contractors receive a whopping 22.2% of the contracts assigned.

An incredible fact is that the top companies have swallowed many of the smaller players in the industry to increase their footprints and capabilities. Over the past 40 years, the companies supplying the government have declined from 100 to the current six top vendors via consolidation or attrition.

We screened the Merrill Lynch research universe, and all six of the top companies supplying the government for defense are rated Buy, and all are great holdings for long-term buy-and-hold portfolios.

Boeing

This stock has traded in a tight range all year and looks ready to break out. Boeing Co. (NYSE: BA) is the world’s leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined.

The different segments in the company are: Commercial Airplanes; Boeing Defense, Space & Security and Boeing Capital, which provides financial solutions facilitating sale and delivery of Boeing commercial and military aircraft, satellites, and launch vehicles.

Boeing and Embraer signed a nonbinding memorandum of understanding to create a new strategic partnership for commercial aviation. The new joint venture is valued at $4.75 billion, which values Boeing’s 80% share at $3.8 billion.

Shareholders receive a 1.86% dividend. The Merrill Lynch price objective is a stunning $450, and the Wall Street consensus target is $412.57. The stock closed Tuesday’s trading at $367.23 a share.

General Dynamics

This company, like other major defense prime contractors, is having a very solid year and is on the Merrill Lynch US 1 list. 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.

Investors are paid a 1.83% dividend. Merrill Lynch has a $275 price target, while the consensus estimate is $236.11. The stock closed Tuesday at $203.48.

Lockheed Martin

This is one of the top aerospace and defense stocks to buy, and many on Wall Street are expecting 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.

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 many foreign allies of the nation.

Investors receive a 2.37% dividend. The $412 Merrill Lynch price objective is well above the consensus target of $377.11. The shares closed Tuesday at $343.58.

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Northrop Grumman

This top defense 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. It 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.

Shareholders receive a 1.53% dividend. Merrill Lynch has set its price objective at $370. The consensus price target is $360.44, and shares closed most recently at $314.41.

Raytheon

This company has a diversified mix of businesses and remains a favorite at Merrill Lynch. 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 and beyond earnings.

In addition, many think Raytheon has the balance sheet capacity to pre-fund its pension to take advantage of the currently higher tax deduction, which could eliminate or reduce mandatory pension funding and provide a lift to 2019 free cash flow and earnings. It is set up for continued strong orders from the wave of recent foreign military sales approvals and strong pipeline of large international missile defense projects.

Raytheon shareholders are paid a 1.71% dividend. The Merrill Lynch price objective for stock is $245. The consensus target is $237.17, and shares closed Tuesday at $205.18.

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United Technologies

United Technologies Corp. (NYSE: UTX) is an industrial conglomerate with four operating units:

1. Otis: the world’s largest elevator company
2. Climate, Controls & Security: includes Carrier, which has commercial and residential HVAC and commercial transport refrigeration equipment and fire and security
3. Pratt & Whitney: military and civil aircraft engines and service operations
4. Aerospace Systems: aviation controls and systems

The Merrill Lynch team note that UTC is strategically building out capability to benefit from the revolution in aircraft connectivity. The connected aircraft revolution and the shift to aircraft connectivity may drive earnings even higher in the future.

UTC investors are paid a 2.15% dividend. Merrill Lynch has a $195 price target. The consensus target is $152.76, and the stock closed Tuesday at $139.71.

These six incredible companies dominate the sector and should continue to do so in the years to come. With third-quarter earnings reports right around the corner, it may make sense to buy partial positions here and see how the results come in.