Of the few defense companies that pass the government clearance required to ensure the walling of security know-how within borders, rich contracts are on offer. Here we will look at some of the key players that are charged with keeping nations ahead of the competition and the borders secure. While defense budgets were slashed during the pandemic to make way for other social programs, under heightened geopolitical tensions, defense is back in the spotlight. Asktraders has come up with the below shortlist of the top three defense stocks for the investor to consider for their portfolio – each one selected for their resilience to perform, even during the current period of economic downturn.
The Best Defense Stocks To Buy Right Now
- Lockheed Martin Corporation (NYSE:LMT)
- The Boeing Company (NYSE:BA)
- Northrup Grumman (NYSE:NOC)
- BAE Systems PLC (LSE:BA.L)
1. Lockheed Martin Corporation (NYSE:LMT)
LMT is the largest defense company in the world. Winning on average 15% of the US government defense contractor spending across all sectors. The proportion is stable, allowing LMT to curate and improve the innovations developed through perennial capital injections.
LMT’s revenue growth trails that of the US government defense spending. The pandemic lockdowns drew government spending away from defense to social programs. The current trailing 12-month (TTM) LMT revenue is down 4% as a result.
Accounting policy dictates that revenue recognition trails government budgets to coincide with the completion of the contract deliverable. The lag in revenue decline from pandemic budget cuts is reflected only in the 2021 and 2022 financials. LMT revenue growth slowed to 3% in 2021 from 11% growth in 2019 and TTM vs. 2021 revenue declined by 4%.
The 2022 US defense budget is 2% higher than 2021. The Biden administration is planning for another 2% in 2023. The current conflict on the European continent will likely raise planned spending through planned and indirect one-time consultative services.
Prior to the pandemic, LMT revenue grew at a steady 5.8% on a stable gross margin above 12% and an operating margin of a shade under 9%.
The current ratio of market capitalization to sales derived from the TTM revenues sits at 1.68, and market capitalization to gross profit of 12.58. The seven-year average of both ratios is 1.58 to 12.92, suggesting the current valuation is trading at a moderate premium on revenue but a moderate discount on gross profit.
Under a theoretical scenario of a 2% growth in revenue – based upon 2021 revenues and assuming, with the clear hindsight of history, the LMT share of government spending and lagged recognition – revenue of $68.4b is implied. Or, In another way, a ratio of 1.58 market cap to sales is in line with the historical average.
The figures suggest that the LMT share price of approximately $400 USD (at the time of writing) is a fair price relative to its recent price history and financial performance.
The LMT investor can be assured that they are presently not overpaying for the current revenue stream relative to the recent past. On top of this, there is an extra incentive in the forward dividend yield of 2.7%. The board has also bought back 57 million shares over the last eight years. The buybacks convert to another implied annual valuation increase of 2.5%, returning a 5.2% combined shareholder disbursement per annum.
Lockheed Martin- Weekly Price Chart – 2021–2022
Source: eToro
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Given the current geopolitical climate, the probabilities are weighted to an increase over a decrease in defense budget spending, providing further assurances to the LMT investor at the current valuation.
LMT is a dependable and secure investment with proven operational excellence and continued demand for its technological expertise from the US military. The current price is more than fair relative to the recent price and will likely provide a bedrock of security to the investor’s portfolio, as one of the morse stable defense stocks.
2. The Boeing CO (NYSE:BA)
Commercial airliners might be the first thing that comes to mind when you think of BA. Forming a duopoly with Airbus for the global commercial airliner fleet, BA is a critical component of the global aviation industry.
No less important to Boeing is the defense, space and security aspect of its operations, generating 43% of enterprise revenues in 2021 – more than the 31% from commercial aviation that we commonly associate with BA.
Boeing develops and manufactures a wide array of mission-critical battle systems for the US military as well as Air Force One.
The centrality of BA products to US missions ensures that revenue streams for the company are secure – today and tomorrow. The wealth of technical expertise in the aeronautical sector assists BA in gaining a foothold in the government space contracts on offer.
Following the widely reported failures in the 737-MAX program, which resulted in FAA and criminal investigations, BA recently has moved to settle the charges with the respective authorities. Its objective has been to resolve the safety concerns of regulators and recommence deliveries on its high-demand airliner.
BA is currently trading at approximately $126 per share, with no dividend as the board regains its capital footing following the heavy losses incurred from the 737-MAX failings and pandemic sale losses.
BA’s 2018 revenue was $101bn. The 737-MAX failings and the impact of the pandemic on the order book materially impacted revenue, nearly halving to $58bn in 2020. The airliner order book should swell on departmental and system reengineering. With provisions in place for the existing litigation and reengineering, the incomes generated will improve as the overall designs of BA widebody and short-haul airlines are still in high demand. Particularly now, with pent-up depreciation on the active BA fleet.
Even a close miss on the 2018 revenues means that the current market capitalization of $75bn is a ratio of less than one to sales. Favorable in comparison to LMT.
The Boeing Company- Weekly Price Chart – 2021–2022
Source: eToro
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BA has gone through a period of introspection and rebuilding after its recent managerial failings. With the force majeure of the pandemic, the capital has suffered. The short time frame in which these events occurred has materially impacted equity.
What remains is a sound set of assets that are proven in the marketplace, with future demand for BA aircraft and expertise still widely in demand now and into the future. The reorganizations will only serve to strengthen BA’s capabilities and improve safety.
For the investor willing to take a chance on 100 years of engineering excellence at a reasonable valuation relative to the revenue potential, BA does offer value especially within the ever shifting defense stocks market place.
3. Northrup Grumman Corp (NYSE:NOC)
Under the banner of national security, the technological advancements in defense are guarded as closely as its borders. The information walls on the intellectual property of the armed forces secure defense company revenues with recurring government spending. In this regard, a further defense stock that is key to US national security is Northrup Grumman Corp.
The history of NOC can be traced back to 1928 and the founding of Avion Corporation by American aeronautical designer John Knudsen Northrop. A year later, aeronautical engineer, Leroy R. Grumman founded Grumman Aircraft Engineering, forming another line of the Corporation’s history. Later formed as Northrop Aircraft Inc in 1939, the company adopted its current name in 1994 as a result of the acquisition of Grumman Corporation. Today, the Corporation finds its home in Los Angeles.
In the time since its formation, NOC has honed its expertise in the manufacturer of nuclear-capable stealth bombers and is heavily involved in the space race. Notably, it operates as the main contractor for the US Air Force’s B-2 stealth bomber and is a main supplier of Boeing’s military aircraft.
NOC operations in the closely guarded avionics, systems, strike, and space sectors provide additional security to the revenue stream as the technological capabilities require constant upgrade and protection. Furthermore, the prevalence of higher engineering results in an improved operating margin.
As a result, the Corporation’s share price trades at a premium relative to its peers in the price-to-sales ratio. It currently stands at around two times its 2021 value. After taking out non-business other income from the net income, the net income for 2021 is $1.2bn against a market capitalization of $73.3bn. This suggests the business valuation is currently quite expensive on a price-to-earnings scale.
Northrup Grumman – Weekly Price Chart – 2021 – 2022
Source: eToro
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In summary, NOC revenue streams are secure now and into the future. The business operates on a healthy operating margin relative to its peers – north of 11%. For the investor looking for a secure income stream, NOC is a good place to turn.
However, traders should note that there could be better times to enter a trade for this cornerstone of American security. At today’s valuation, NOC does not offer obvious value as in the world of defense stocks currently. LMT and BA might offer the investor better value today.
4. BAE Systems PLC (LSE:BA.L)
Further afield is BAE systems. Founded in Farnborough UK in 1970, BA.L has grown to be an integral player in the international security and defense sector. Employing around 90,500 people across over 40 countries, BA.L provides defense, aerospace, and security solutions worldwide.
Renowned for its systems and technological capabilities, BA.L is a key partner to international governments as they defend against modern threats. Most recently, the firm’s Beowulf vehicle won the US Army’s cold weather all-terrain vehicle competition, receiving a $287m contract for production units.
For the investor in the defense sector looking to diversify across borders, whilst ensuring that the corporation is a market leader in its sector, BA.L could be an excellent choice.
BA.L currently trades with a generous forward dividend yield of 3.2% and a market capitalization of a reasonable 1.3 times sales. Prior to the pandemic, revenues were growing at 9% year-over-year, the proximal situation on the continent will likely see additional contracts awarded to BA.L by the UK government.
For the US investor, BA.L assets are currently on sale following the near 10% decline in the GBP and only a modest 2% uptick in the share price over the same period for BA.L. This has offered an 8% cut on BA.L net assets from one month ago.
BAE Systems – Price Chart – 2021–2022
Source: Yahoo
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Indeed, for the international investor willing to bet on this critical defense arm of the UK or diversify from the US defense sector, BA.L could be the stock you are looking for.
Final Thoughts
Defense companies are those that have been thoroughly vetted for government spending, have trusted and secure technological capabilities, and engineer the security of our nations.
With the assets of defense companies too critical to national security to leave idle, steadily growing revenue streams are secured, ensuring a steady appreciation in the value of any investment over time.
There are a number of defense companies, and therefore defense stocks, to choose from outside of those listed above, which may be better tailored to your investment strategy. In any case, an element of research and analysis is always highly recommended.
Asktraders has a wealth of quantitative and qualitative tools at your disposal. Traders are advised to perform due diligence before making any investment and keep up to date with the latest trends and market moves by following our detailed analysis.
