Companies in the defense sector have navigated choppy seas over the past 18 months as a federal government drowning in red ink sought its lifeboat in massive military spending cuts.
Defense Secretary Robert Gates fired a shot across the industry’s bow last May when he said the defense spending spigot that was opened wide after 9/11 “has been turned off and will stay off for a good period of time.”
The net result of those actions was to drive shares of many major defense firms to their 52-week lows last fall.
But a tidal wave of political unrest in the Middle East that culminated in military operations against Libya last week clearly demonstrates why the era of big military spending is not yet over.
And that’s good news for defense companies that are positioned to turn the current bounce into better earnings.
So if the U.S. is destined play the role of global policeman, having the right tools for the right job is imperative. Because defense sector stocks have slipped a lot as the engagements in Afghanistan and Iraq wound down, several names are undervalued. Here are four U.S. defense stocks that are poised to move now:
Raytheon (NYSE:RTN): All those Tomahawk cruise missiles lighting up the skies over Libya are made by Raytheon – and the U.S. Navy lit off 124 of the missiles (at more than $1 million a pop) to take out anti-aircraft defenses and surface-to-air missile batteries. Raytheon produces SAM missile batteries of its own, too – most notably the Patriot system. The company also has expertise in electronics — a hot area for military and homeland security development and upgrades. While just a drop in the bucket, the company’s $1.9 million award to secure military Internet communications last week signals a potentially huge area of future development in information infrastructure security. Raytheon is up 62 cents, or 1.2%, over the past week, closing at $50.39 on Tuesday.
General Dynamics (NYSE:GD): Known for high-profile marine and combat systems like the Los Angeles-class attack submarine and the M1 Series Abrams battle tank, more than one-third of General Dynamics’ revenue comes from information systems and technology. On Wednesday, the company announced a $41.4 million deal from the Marine Corps to upgrade vehicles for mine and ambush protection. Earlier this month, the Defense Intelligence Agency awarded GD a five-year, $40 million contract to manage its enterprise services help desk. The company’s shares have risen more than 3% over the past week to close at $76.04 on Tuesday.
Northrop Grumman (NYSE:NOC): The diversified defense-aerospace giant has had a lot of news coverage this past week — its Global Hawk drone flew over Japan to provide imagery in the current disaster and the christening of its new amphibious transport ship Arlington is scheduled for Saturday. But the biggest upside in an era of defense downsizing may be in its information technology business. The company bagged a $1.1 billion follow-on deal this week to operate and upgrade the Homeland Security Dept.’s classified networks. The U.S. Air Force also tapped the company for a $26 million contract to enhance automated mission planning capabilities on the B-1 bomber. Northrop Grumman is up nearly 5% over the past week, closing at $67.98 on Tuesday.
Lockheed Martin (NYSE:LMT): Lockheed Martin is well-positioned to reap the rewards from defense R&D as well as deployment. It’s looking more likely that the Navy will be the lead service in charge of developing a system to protect the U.S. and its allies from the launch of ballistic missiles from rogue states like Iran. Lockheed Martin’s ship-based Aegis combat system has been upgraded to intercept a wide range of ballistic missile types under development. The Navy also awarded the company a $376 million contract this week to construct the second Littoral Combat Ship. Over the past week, Lockheed Martin shares have risen 3.7% to close at $81.30 on Tuesday.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
