Many investors look at the headlines and see that the defense budget is being cut and they immediately assume that this is bad for defense stocks.
However, if you take the time to dig down into the budgets numbers you see that many of the cuts have to do with reducing the size of the force and eliminating older weapon systems.
Equipment and systems that allow troops to do more with less like command and control technologies and drones are still going to be in very high demand as will more efficient weapon systems.
Investors also need to consider that global defense spending is going to increase this year for the first time since 2009. While much of that is going to come from countries like China and Russia and will be of no benefit to US based defense contractors, as they can and do sell to some of the hot test markets for weapons and military systems like Saudi Arabia and Oman.
Saudi Arabia has seen its defense budget triple in the past decade and spending is currently growing at about 30% a year. A significant percentage of that money will be spent with U.S. companies.
Here are three defense stocks that could benefit from the coming U.S. defense budget:
Defense Stocks to Buy: Raytheon (RTN)
Raytheon (RTN) is one of those companies that does a lot of business with the Saudis. In fact they recently sold them 15,000 anti-tank missiles to Saudi Arabia for roughly $1 billion. The company is the sixth largest military contractor, specializes in making high-tech missiles, advanced radar systems and sensors, defense electronics, and missile-defense systems.
If we slash the size of our forces then missile defense and attack systems become even more critical and we could actually see the cuts leading to increased business for RTN. They are looking to grow their international business and in addition to the recent Saudi order, RTN sold $655 million Patriot missiles to Kuwait and won a $123 million contract from the Republic of Korea Navy to supply the latter with nine Phalanx Weapon Systems.
The headlines might say otherwise, but the real story is that business is solid for Raytheon, and RTN stock is a strong buy right now.
Defense Stocks to Buy: Northrop Grumman (NOC)
Northrup Grumman (NOC) is the third largest defense systems contractor in the world. NOC is engaged in areas of the defense that will not see budget cuts like cybersecurity, missile systems, airborne reconnaissance systems like unmanned drones, intelligence gathering systems and air defense technology.
All of these systems and technologies will make it possible for the military to do more with fewer personnel and will be a critical part of the budget if the U.S. does downsize troop levels. The company is also a buyback machine and has plans in place to buy back up to 25% of its outstanding shares by the end of 2015. In spite of the gloomy headlines about the budget this stock is a strong buy at the current price.
Defense Stocks to Buy: Lockheed Martin (LMT)
Lockheed Martin (LMT) is in pretty much the same position as Northrop Grumman.
Many of its products and services are mission critical in nature and will not see steep cuts in demand from military budget cuts. Although the Pentagon is expected to cut its orders for the new F-35 fighters down by 33 over the 5-year period starting in 2015.
However, the program is still going to produce almost $400 billion of revenue for LMT by the time it is all done and that doesn’t include orders from partner nations likethe UK, Italy, Norwayand Canada.
Thanks to the still bright prospects and strong fundamentals LMT is also a strong buy at the current price.
The headlines often tell one story while an in-depth investigation reveals another. The pending budget cuts may look bad on the surface but a deeper look shows that they may actually be great news for many defense contractors.
Louis Navellier is the editor of Blue Chip Growth.