RBC Picks 3 Defense Contractor Stocks as Top Performers

The U.S. national defense budget for fiscal year 2022 totaled $777.7 billion and expires at the end of September. President Joe Biden has submitted a fiscal 2023 Pentagon budget totaling $773 billion and a total national defense budget of $813 billion. The House passed its version of the National Defense Authorization Act (NDAA) in July, appropriating $838 billion for the nation’s defense needs. The Senate Armed Services Committee in June approved a proposed budget of $817 billion, but the full Senate has yet to vote on the NDAA.

The increase to 2022 spending levels reflects so-called unfunded Pentagon priorities, inflation, replenishing weapons stockpiles reduced by shipments of arms to Ukraine, and full funding for the Ukraine Security Assistance Initiative.

Virtually no one expects the NDAA to be passed by Congress and signed by the president by the October 1 start date of the 2023 fiscal year. But that does not mean that all’s quiet on the defense front.

On Monday, analysts at RBC Capital Markets initiated coverage of five top defense contractors, identifying three as top performers in the sector. The five firms added to RBC’s coverage are General Dynamics Corp. (NYSE: GD), L3Harris Technologies Inc. (NYSE: LHX), Leidos Holdings Inc. (NYSE: LDOS), Lockheed Martin Corp. (NYSE: LMT) and Northrop Grumman Corp. (NYSE: NOC).

One point Herbert makes for these five prime defense contractors is their shareholder-friendly capital allocation strategy.

RBC analyst Ken Herbert initiated coverage of General Dynamics with an Outperform rating and a price target of $275. At a recent trading price of around $232.70, the implied upside on the stock is 19.5%. The average price target of 17 analysts is $259.33. The stock’s 52-week trading range is $188.64 to $254.99. The total shareholder return for the past year was 19.3%.

Herbert notes GD’s forecast for Gulfstream business jet deliveries rising from 123 in 2022 to 148 next year and 170 in 2024. That implies a $2 billion revenue increase in 2023 and a $1.6 billion increase in 2024. The company’s own outlook for a 9% increase in IT revenue is shakier Herbert believes. U.S. support for Ukraine has juiced GD’s combat division, and RBC expects a low-single-digit revenue increase next year and a sustained mid-single-digit increase in the company’s marine division.

L3Harris gets an Outperform rating and a price target of $285 from RBC. Based on a share price of around $232.50, the upside potential to RBC’s target is 22.6%. The average price target of 18 analysts is $279.63. The stock’s 52-week trading range is $200.71 to $279.91. The company’s total shareholder return for the past year was 1.6%.

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