It’s an unfortunate state of the world, but few see a chance on the horizon for a decline in demand for military and defense related products and services. From cybersecurity to naval ships and missiles to drones, seven leading financial experts — and contributors to MoneyShow.com – highlight their top investment ideas in the defense sector.
Orbital has added about 15% to Northrop’s revenue base. So far there have been no hiccups, with Orbital being nearly fully integrated into the whole. Margins have remained at pre-acquisition levels. That’s a bit disappointing but not unexpected in that the company’s business lines, while largely dedicated to defense, do not directly overlap with those of other Northrop divisions.
Specifically, IS is dedicated to small space systems and satellites (for both defense and commercial) while prior to IS, Northrop concentrated on much larger space systems. Other areas promise rising margins over the longer term because the Defense Department has specified them as necessary, including missile products, ammunition, electronics, aerospace and propulsion structures, and launch vehicles.
By and large these areas are new and fully complementary to Northrop’s existing operations. The company continues to target $150 million in cost savings by 2020, which means we should begin to see margins rise with the next quarterly report.
The one area where we have seen a synergistic contribution is in international sales, where IS has a much stronger presence than Northrop. In the most recent quarter, international sales were the largest ever for Northrop.
With the Northrop brand supporting IS, international sales should continue to grow faster than when IS was a stand-alone entity. Compared to other defense companies, international sales for Northrop had been lagging as a percentage of total sales. Street recognition of its increased international presence could lead to an increase in Northrop’s P/E.
Also positive is that free cash flow (FCF) in the fourth quarter reached record levels, with the gains more than commensurate with the added revenues brought in by IS. Prior to the Orbital acquisition we were projecting profits of about $23 a share in 2021. Now assuming cost synergies live up to their estimates and the signs of revenue synergies continue, 2021 profits could approach $25 a share.
We also expect FCF to grow faster than earnings and potentially reach $3.7 billion by 2021, resulting in an FCF yield of nearly 8% based on the current price. Overall the acquisition is on target for increasing earnings and FCF growth as well as broadening the company’s scope both geographically and in areas of competence. A higher P/E paired with accelerating earnings should result in strong gains in the years ahead.
We believe that
An October 2018 paper from the US Navy provided a strong assessment of the US Government’s Naval needs and where the Navy should be over the next 30 years with respect to naval ships backlog.
The Navy made the proposal to create one of the largest shipbuilding proposals since Reagan, as a number of major ships (nuclear, non-nuclear, submarines etc.) have not been updated in decades.
The company has a $22 billion backlog that will continue to grow given the ongoing needs and strategic nature of the US Navy versus the rest of the armed forces.
However, there is also another catalyst to the firm’s growth, which is their Technical Advisory business unit. This business unit provides IT, cybersecurity and other professional services to the US Government and large multinationals like
The company entered into a bear market in Q4 of 2018 and provided tremendous value in December, but we believe it is not too late to enter into the stock. We have a 2-year price target of $303.91 per share.
Imagine a squadron of battle ready drones flying alongside U.S. military fighter jets. It’s not a video game. It’s part of a Pentagon plan to reduce costs. A jet powered Valkyrie drone successfully buzzed the skies of Yuma Arizona , according to an
Military aircraft are expensive and often plagued with development problems. The standard version of the F-35 fighter jet costs $89.2 million. The XQ-58A Valkyrie project might provide a solution. At only $2 million to $3 million a pop, it’s cheaper than the cost of a Patriot missile.
But its real appeal is the potential to fly alone or as part of a swarm, controlled by a manned aircraft or from ground control. Squadrons of Valkyrie could serve as wingmen to expensive, piloted fighter jets, flying ahead to strike or surveille enemy targets — just like in video games.
The best way for investors to play wingman drones and other cutting edge aircraft is
TransDigm managers don’t think like engineers. They behave more like investment bankers, looking to acquire businesses that will spin off private equity-type returns to investors.
Since 1993, they have acquired 60 OEM aerospace parts businesses with these profiles. The company is now the sole supplier for 80% of the end markets it serves. And 90% of the items in the supply chain are proprietary to TransDigm.
In other words, the company is operating a monopoly for parts needed to operate aircraft that will typically be in service for 30 years. Sales grew 8.8% in fiscal 2018, to $3.8 billion. The company earned $905.4 million in profits. That trend continued in the fiscal first quarter results, as the company earned $196 million in profits on $993 million in sales.
While shares trade at 6x sales and 25.3x forward earnings, expensive by aerospace standards, the company is more like a successful private equity fund. Managers are uniquely motivated to increase shareholder value and they have an enviable record. Shares are up 2,503% since 2009. TransDigm has pulled back in recent weeks; you can buy it now around the $430-$435 area.
And it specializes in intelligence support. That includes cybersecurity. And that’s the future of U.S. defense. is one of the top government contractors. And it specializes in intelligence support. That includes cybersecurity. And that’s the future of U.S. defense. LDOS is positioned to keep growing as long as the U.S. government continues to exist.
We award the stock an earnings grade of “A”. The company has beat or met estimates in four of the past four quarters.
In recent news, Leidos received $962M Navy contract. Leidos beat earnings last month, but issued downside EPS guidance for the future. So the stock sold off a little bit. It recovered quickly after the company announced a new $962 million contract with the
But it’s finished the month flat. Year-to-date, however, we’re up about 20%. Leidos is one of the top government contractors. And it specializes in intelligence support. That includes cybersecurity. And that’s the future of U.S. defense.
The company is positioned to keep growing as long as the U.S. government continues to exist. The stock is still a “Buy” for anywhere under $75, and the 12-month target is $100.
Northrop Grumman (NOC), featured in our Portfolio Selector Focus List, is a global defense contractor with a focus on aerospace and, increasingly, electronic programs (including cybersecurity).
As well, no sector outside technology is embracing the digital economy as fully and quickly as industrials, where sensors, connectivity, and AI-based automation are transforming the modern factory
The company’s balance sheet is clean, and management has a history of meeting and beating analyst expectations. The shares are susceptible to headlines about cuts in defense spending and budget ceilings, as well as tweets and threats about trade and tariffs.
However, we believe that recent defense-spending developments bode well for the industry for at least the next two years, and management has a history of navigating volatile political environments.
For the March quarter, Hexcel (HXL) is projecting gross profit margin to climb nearly a percentage point to 27.0%. The company posted its highest margins of 2018 in the December quarter, reflecting productivity gains and manufacturing improvements.
A leading maker of advanced composites, Hexcel focuses on carbon-fiber materials used in aerospace, defense, and space markets. The company is benefiting from strong market positions and a sizable order backlog.
One overhanging risk is a concentrated customer base that includes Boeing (BA), which accounted for 25% of sales last year. Over the past 90 days, analyst profit estimates for Hexcel have risen for full-year 2019 and 2020. Hexcel seems reasonably valued considering its bright growth outlook.
For 2019, per-share profits are projected to climb 14% on sales growth of 11%. Over the next five years, per-share earnings are expected to advance 10% annually. Hexcel, with an Earnings Estimates score of 83, is rated Buy.
Nearly a century after its founding,
By the end of World War II, every U.S. patrol torpedo boat was equipped with the Raytheon radar, allowing them to see at night and to search and destroy U-boats. After the war, Raytheon began offering civilian products; the most famous was the microwave.
Over the following decades, Raytheon introduced the first missile capable of intercepting inflight objects; helped guide the Apollo 11 and transmit the TV signals back to Earth; and developed the Patriot missile defense system.
During the past five years, Raytheon has grown revenues at a steady 4.3% annual rate. During the same period, net income and EPS have compounded at striking 7.1% and 9.9% annual rates, respectively. Raytheon’s profit margin averaged more than 9% during the previous five years, including an impressive 10.7% during 2018.
Return on equity has averaged more than 20% for the last ten years, demonstrating the company’s strong competitive advantages. Raytheon has increased their dividend for 14 consecutive years with the dividend compounding at a 9.4% annual rate during the past five years.
During 2018, Raytheon generated $2.7 billion in free cash flow and returned $2.3 billion to shareholders through dividends of $975 million and the repurchase of 6.7 million shares for $1.3 billion. Since 2007, Raytheon has repurchased shares each year reducing their share count by 35%.
The company’s strong position in missiles and radars coupled with increased defense spending under the current administration provide a solid foundation for 2019. Long-term investors should place Raytheon on their radar, a high-quality global market leader with growing dividends, solid growth, durable competitive advantages and profitable operations. Buy.
Ned Piplovic, StockInvestor
After retreating more than 25% from its all-time high of nearly $230 in March 2018, the
While drops of that magnitude generally indicate deeper troubles, General Dynamics does not show any fundamental weaknesses and the its earnings keep exceeding investors’ and analysts’ expectations. While lower than the all-time high, the current closing price is clearly still in the average range of the uptrend over the past two decades.
The Aerospace segment designs, manufactures and supports business-jet aircraft, primarily under the Gulfstream brand. The Combat Systems segment designs, develops and manufactures combat vehicles, weapons systems and munitions.
Additionally, the Mission Systems segment offers mission-critical Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) products and systems such as cyber systems and products for intelligence gathering and space exploration.
The Marine Systems segment designs and builds nuclear-powered submarines and surface combat vessels, as well as auxiliary and combat-logistics ships for the U.S. Navy and Jones Act ships for commercial customers.
On January 30, 2019, General Dynamics reported fourth-quarter 2018 revenues of $10.4 billion, which was 25.4% higher than revenues in the same period last year. All five of General Dynamics’ business segments contributed to the revenue growth in the last quarter.
Net earnings of $909 million were equivalent to $3.07 earnings per share (EPS), which was an improvement of almost 45% over the same period last year. Additionally, the $3.07 EPS beat analysts’ expectation of $2.98 by 3%.
Full-year revenues of $36.2 billion were nearly 17% above the $31 billion revenues in 2017. Net earnings advanced 15% to $3.35 billion, which was equivalent to an $11.22 adjusted earnings per diluted share.
During 2018, General Dynamics returned $2.8 billion to shareholders. Nearly 65% of those funds came through repurchasing of more than 10 million shares and $1 billion was the total of all dividend income distributions in 2018.