The past week has been tumultuous for the major global stock markets, as Russian troops officially penetrated Ukraine’s borders in a full-blown war. Russia’s “unprovoked aggression” against Ukraine, as the White House calls it, was met with condemnation from across the world, and various sanctions were imposed on Russia by the West in an attempt to economically weaken the nation. Moreover, air spaces of several countries were shut to Russian flights. These moves led to a crash in the Russian ruble against the dollar and a significant hike in Russian interest rates.
However, despite Ukraine’s remarkable resistance and Russia’s political and economic isolation from the West, speculations are still rife about Russia upping its ante and resorting to more aggressive military tactics to get what it wants. This unfortunate event is leading nations to take their defense capabilities seriously and review their defense budgets in order to strengthen their forces against any untoward event. For instance, earlier this week, Germany pledged around $112.7 billion to enhance its armed forces and committed more than 2% of its GDP toward defense spending.
It is times like these that harshly remind us about investing in safe instruments including safe stocks, especially those which are in an evergreen space like defense. Now, no one loves the concept of war, but thinking from an investor’s point of view, such uncertainties do make us look at areas that will keep our money safe or even maximize our returns. Defense stocks have always outperformed during geopolitical tensions, and Wall Street is vouching for the uptrend in defense stocks to continue, as U.S. allies increase their defense spending.
Importantly, Defense Secretary Lloyd Austin and the White House’s Office of Management and Budget are reportedly in talks to allot $770 billion toward Defense for Fiscal 2023 starting October 1, which may eventually be pushed further to settle around $800 billion. This budget is expected to benefit U.S. defense contractors like Lockheed Martin (NYSE: LMT), Northrop Grumman Corp. (NYSE: NOC), and General Dynamics (NYSE: GD), immensely. Notably, the national defense budget proposition during Trump’s final year in office was $752.9 billion, which was eventually settled at $778 billion for Fiscal 2022.
Lockheed Martin Steals the Show
The first stock that comes to mind while talking about value creation in the defense space is the world’s largest defense contractor, Lockheed Martin, which specializes in defense, space, homeland security, information technology, and cyber security. At the market close yesterday, LMT stock rallied 5.26% in its 5th straight session of gains.
Recently, the company started dipping its toes in the development of offensive as well as defensive hypersonic weapons. A steady flow of high-value orders from the Pentagon has boosted the company’s top and bottom lines, and also helped it pay consistent dividends over the years. In the full year of 2022, Lockheed Martin expects to deliver earnings per share of $26.7 on revenues of about $66 billion.
Recently, UBS analyst Myles Walton maintained a Buy rating on Lockheed Martin and raised the price target to $465 from $425. The rest of Wall Street maintains a cautiously optimistic stance on the stock, with a Moderate Buy consensus rating based on 6 Buys and 8 Holds. The LMT price prediction reflects an average price target of $418.07.
Northrop Grumman Can Be a Good Bet
Global aerospace and defense technology company Northrop Grumman is another stock to consider amid the mounting geopolitical tensions. The NOC stock gained 3.16% at yesterday’s market close, and has returned 55.25% in the past year.
A strong portfolio of contracts, and a shareholder-friendly capital return policy of returning a large proportion of its free cash flow through dividends and buybacks, make this stock a favorite among investors in the defense space.
The upcoming B-21 stealth bomber, an American heavy bomber that is still under development, is expected to be one of the company’s biggest cash cows. The Air Force intends to purchase 80 to 100 of them to replace old planes.
UBS analyst Myles Walton recently maintained a Hold rating on the stock, but raised the price target to $410 from $375. The consensus rating on the stock is Moderate Buy based on 3 Buys and 5 Holds. The average NOC price target is $405.71.
General Dynamics Thriving on Conflicts
Another aerospace and defense giant, General Dynamics, is a leading provider of technologically advanced business jets, combat vehicles, command and control systems, as well as nuclear submarines. The stock has returned 42.59% in the past year.
A strong flow of orders and continued product innovations have kept the company among the top defense stocks.
Morgan Stanley analyst Kristine T. Liwag reiterated a Hold rating on the stock today. However, the analyst raised the price target to $243 from $215. Wall Street consensus sentiment is fairly optimistic, with a Moderate Buy rating based on 5 Buys and 3 Holds. The General Dynamics stock price projection points at an average price target of $241.57.
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