The defense sector presents promising investment opportunities this year due to factors like rising defense spending, global conflicts, military modernization, and technological advances, including evolving warfare situations. Consequently, technological advancements in radar, AI, and analytics are enhancing modern warfare, driving growth in the defense systems market.
Hence, it could be wise to invest in defense stocks such as Northrop Grumman Corporation (NOC), TransDigm Group Incorporated (TDG), and Lockheed Martin Corporation (LMT), as they hold significant growth potential amid increasing global defense expenditure.
Global military spending rises due to heightened geopolitical risks, notably Russia's actions in Ukraine. The U.S. has allocated $61 billion for Ukraine, primarily for military aid including weapons, ammunition, and equipment, prompting major players like LMT and NOC to hire extensively, signaling sector expansion. Analysts project 4.7% CAGR growth in the air defense systems market, reaching $58.51 billion by 2029.
Furthermore, the U.S. Defense Department's FY 2025 budget request of $849.8 billion prioritizes air defense, with $61.2 billion aimed at bolstering U.S. air superiority. This underscores the emphasis on modernizing air defense capabilities to uphold superior air power. The aerospace and defense market is forecasted to grow at a 5.9% CAGR, reaching $1.08 trillion by 2027.
Therefore, let’s analyze the fundamentals of the three Air/Defense Services picks, beginning with the third choice.
Stock #3: Northrop Grumman Corporation (NOC)
NOC operates as an aerospace and defense company worldwide. It operates through the Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems segments.
In terms of the trailing-12-month Return on Common Equity, NOC’s 14.70% is 17.2% higher than the 12.54% industry average. Likewise, its 4.33% trailing-12-month Capex / Sales is 49.5% higher than the 2.90% industry average. Furthermore, its 0.87x trailing-12-month asset turnover ratio is 11% higher than the 0.79x industry average.
NOC’s total sales for the fiscal first quarter that ended March 31, 2024, amounted to $10.13 billion, up 8.9% year-over-year. In addition, its operating income rose 13.1% from the year-ago quarter to $1.07 billion. The company’s net earnings stood at $944 million and $6.32 per share, up 12.1% and 14.9% over the prior-year quarter, respectively.
For the quarter ending June 30, 2024, NOC’s EPS and revenue are expected to increase 11.4% and 4.7% year-over-year to $5.95 and $10.03 billion, respectively. It surpassed the Street EPS and revenue estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 1.4% to close the last trading session at $430.67.
NOC’s favorable outlook is reflected in its POWR Ratings. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Momentum and Stability. It is ranked #28 out of 71 stocks in the Air/Defense Services industry. Beyond what we stated above, we have also rated NOC for Growth, Value, Sentiment, and Quality. Get all ratings of NOC here.
Stock #2: TransDigm Group Incorporated (TDG)
TDG designs, produces, and supplies aircraft components in the U.S. and internationally. The company operates through Power & Control, Airframe, and Non-aviation segments.
On June 6, 2024, TDG completed the acquisition of the Electron Device Business of Communications & Power Industries for $1.385 billion. The business, serving the aerospace and defense market, generated approximately $300 million in revenue in fiscal year 2023.
On May 28, 2024, TDG announced a definitive agreement to acquire Raptor Scientific for approximately $655 million in cash. This acquisition will strengthen TDG’s portfolio with Raptor's proprietary aerospace and defense testing and measurement solutions.
TDG’s trailing-12-month Return on Total Capital of 11.08% is 54.2% higher than the industry average of 7.19%. Likewise, its trailing-12-month EBIT margin and EBITDA margin of 45.48% and 49.34% are 347.7% and 258.5% higher than the industry averages of 10.16% and 13.76%, respectively.
For the fiscal second quarter that ended March 30, 2024, TDG’s net sales increased 20.5% year-over-year $1.92 billion. The company’s gross profit stood at $1.15 billion, up 24% from the year-ago quarter. Furthermore, its adjusted net income rose 35.5% and 33.6% over the prior-year quarter to $462 million and $7.99 per share.
Street expects TDG’s EPS and revenue for the quarter ending June 30, 2024, to increase 16.7% and 14.8% year-over-year to $8.46 and $2 billion, respectively. TDG surpassed the consensus EPS and revenue estimates in each of the trailing four quarters. The stock has gained 62.5% over the past nine months to close the last trading session at $1,328.05.
TDG’s bright prospects are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #20 in the same industry. It has a B grade for Momentum, Stability, Sentiment, and Quality. In addition to the POWR Ratings grades I’ve just highlighted, you can see TDG’s ratings for Growth and Value, here.
Stock #1: Lockheed Martin Corporation (LMT)
LMT is a security and aerospace company that engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. The company operates through Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space segments.
On June 20, 2024, LMT successfully integrated digital command and control (C2) capabilities with the Department of Defense's Joint Fires Network during the Valiant Shield exercise. This integration enhances warfighter workflows and decision-making, showcasing LMT’s commitment to advancing CJADC2 capabilities for the Joint Force.
On June 18, 2024, LMT was chosen by NASA to develop and construct the GeoXO weather satellite constellation for NOAA, enhancing weather forecasting with new ocean and air pollution observations. This $2.27 billion project aims to improve severe weather monitoring and climate understanding through cutting-edge satellite technology.
In terms of the trailing-12-month net income margin, LMT’s 9.73% is 60.1% higher than the 6.08% industry average. Likewise, its 21.83% trailing-12-month Return on Total Capital is 203.8% higher than the industry average of 7.19%. Also, the LMT’s 1.27x trailing-12-month asset turnover ratio is 61.8% higher than the industry average of 0.79x.
LMT’s net sales for the fiscal first quarter that ended March 31, 2024, grew 13.7% year-over-year to $17.20 billion. Also, its aeronautics net sales increased 9.2% year-over-year to $6.85 billion. The company’s non-GAAP net earnings stood at $1.53 billion, while its non-GAAP EPS came in at $6.33. Moreover, its cash from operations rose 4.5% year-over-year to $1.63 billion.
Analysts expect LMT’s revenue for the quarter that ended June 30, 2024, to increase 1.7% year-over-year to $16.98 billion. Its EPS for the fiscal 2025 is expected to grow 6.1% year-over-year to $27.82. It surpassed the Street EPS and revenue estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 14% to close the last trading session at $471.51.
LMT’s POWR Ratings reflect strong prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
It has a B grade for Value, Momentum, Stability, and Quality. It is ranked #2 in the Air/Defense Services industry. To see LMT’s Growth and Sentiment rating, click here.
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LMT shares were trading at $469.02 per share on Tuesday afternoon, down $2.49 (-0.53%). Year-to-date, LMT has gained 4.94%, versus a 14.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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