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5 Defense Stocks That Could Get Hit By Sequestration

$1 trillion in spending cuts could imperil national security, new pentagon report says

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Raytheon (RTN)

In 2013, Raytheon (RTN) reported EPS of $6.38 on $23.7 billion in revenue. The company, which derives most of its revenue from military products like the Tomahawk Land Attack Missile and the Patriot Surface-to-Air Missile, also has been focused on cutting costs.

The company’s investors were pleased by RTN’s large-scale stock repurchases last year. Despite lower U.S. defense spending, RTN is growing international sales for its integrated defense and missile systems. Nevertheless, the Pentagon says it will have to cut 531 of GD’s Advanced Medium-Range Air-to-Air missiles if Congress lets sequestration stand.

Northrop Grumman (NOC)

Northrop Grumman (NOC) ended 2013 with earnings of $8.35 per share on $24.7 billion in revenue. NOC, whose key defense programs include its rock star Global Hawk unmanned drone, E2-D Hawkeye surveillance aircraft and high-test cybersecurity solutions, also cut costs aggressively last year.

While conventional wisdom suggests that DOD would rely more on unmanned aircraft in tight budget times, that’s not the outcome the Pentagon report envisions. In fact, the cuts call for DOD to divest the Global Hawk Block 40 fleet of advanced drones. Privately held General Atomics’ Predator drone also would be phased out by 2016, the report said. If the Pentagon’s drone purchases crash, it could have a big impact on NOC, which is struggling with volatile earnings recently.

Boeing (BA)

Despite a wild year that saw defense cuts and Boeing’s (BA) flagship 787 Dreamliner grounded for months, Boeing survived the turbulence well: earnings for 2013 were $7.07 per share on revenue of $86.6 billion.

Although defense cuts slightly hit the company’s revenue, Boeing has managed to grow margins and market share, while managing costs effectively — and commercial aircraft sales remain white-hot. Still, the Pentagon says it will have to axe 67 Apache helicopters and five KC-46A tankers if sequestration can’t be derailed — and that could hurt margins and earnings for BA stock.

Bottom Line

Defense stocks have had an amazing run over the past year despite the Pentagon’s extreme belt tightening. Companies like LMT, GD, NOC, BA and RTN have aggressively cut costs, boosted sales to international buyers and taken advantage of powerful non-defense business lines. Because of this, defense stocks have rewarded shareholders with strong performance and attractive dividends.

That said, these defense stocks are trading near their 52-week highs, and from a valuation perspective, none of them look like bargains now. If you’re already in these defense stocks there’s no reason to panic — these are still strong stocks, and the dividend income further sweetens the pot. But now is not the best time to get into any of these defense stocks, as there is likely to be a pullback in the near future.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.  

Article printed from InvestorPlace Media,

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