With the Pentagon seeking another 20% in spending cuts for the fiscal year that begins on Oct. 1, it makes sense for investors to give defense/aerospace stocks a wide berth.
But such a move would be short-sighted as defense companies are cutting costs, diversifying into other business areas and boosting international sales.
The headwinds facing defense stocks are significant – last week, the Pentagon announced plans to reduce spending in 2016 by 20% — a whopping $51 billion. It doesn’t help that another round of automatic budget cuts (sequestration) is scheduled for the 2016 fiscal year.
That said, there are some strong tailwinds for investors of defense stocks that diversify into non-military business lines, cut costs and improve efficiency, or optimize weapon system sales outside the U.S.
With that in mind, here are three defense stocks to buy now:
Defense Stocks to Buy: United Technologies Corporation (UTX)
Dividend Yield: 2.1%
Market Cap: $103.4 billion
If you’re looking for diversification, United Technologies Corporation (UTX) is a great place to start — the company’s units are engaged in everything from military helicopters to heating and air conditioning systems and elevators.
Perhaps the biggest change for UTX going into 2015 is its new CEO, Greg Hayes. Hayes, a 15-year veteran of United Technologies and its former CFO, stepped into the top job after the sudden resignation of Louis Chenevert.
Hayes has hit the ground running, noting that he will review all of the company’s business units and products with an eye toward selling or spinning off some units and considering acquisitions larger than $20 billion — larger than UTX’s 2012 acquisition of Goodrich. The company is a big player in commercial aviation supply, including Pratt & Whitney jet engines and Goodrich landing gear components.
UTX will next report earnings on Jan. 27 — analysts are expecting quarterly earnings per share (EPS) of $1.63 on revenue of $17.1 billion.
Defense Stocks to Buy: Boeing Co (BA)
Dividend Yield: 2.8%
Market Cap: $92.8 billion
Boeing Co’s (BA) strong presence in commercial aircraft was clearly evident in the 1,432 net orders BA bagged in 2014; deliveries hit a record 723 aircraft last year.
Boeing’s commercial airplanes unit has a monster backlog of $430 billion now — that’s great news since that division generates more than 60% of BA’s total revenue. Commercial aircraft sales will continue to be a big boon for the company over the long haul, particularly given its aggressive production targets in the next few years.
While some investors see Boeing’s Defense, Space and Security unit as the company’s weakest link in light of defense cuts, the unit delivered 179 military planes and five satellites last year.
The best news involved BA’s helicopter sales: there were 54 CH-47 Chinooks and 45 AH-64 Apaches last year. BA has a $60 billion backlog on its military aircraft.
Defense Stocks to Buy: Raytheon Company (RTN)
Dividend Yield: 2.3%
Market Cap: $32.6 billion
When you think of Raytheon Company (RTN) products, people most often think high-profile missile programs like the Patriot, Tomahawk and Sidewinder. But RTN actually has its fingers in a lot of different pots.
Consider RTN’s radar and military electronics components, which are used in thousands of DOD programs. These components, which essentially offer sophisticated, but less expensive ways to upgrade weapon systems, are likely to do better than some large program-specific prime contractors.
Raytheon is more of a defense pure play than many of its peers, but even as Pentagon spending slows, RTN’s quest for foreign military contracts should help offset the budget cuts. Last year, foreign military sales accounted for 30% of RTN’s revenue — and that share should rise in 2015 as well.
For example, RTN last month won a $491.5 million Air Force contract to continue production of the Advanced Medium-Range Air-to-Air Missile (AMRAAM). The contract provides for foreign military sales of the missile system to South Korea, Oman, Singapore and Thailand. RTN also won a $2.4 billion contract to supply 10 Patriot missile systems to Qatar.
As of this writing, Susan J. Aluise did not hold a position in any of these aforementioned stocks.
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