When most investors and the public at large see images of fighter jets, warships and other large “sexy” multi-billion dollar weapons systems, the prime contractors responsible for them come to mind. The prime contractors, though, can’t manufacture these complicated bits of hardware by themselves.
Take Lockheed Martin Corporation’s (NYSE:LMT) F-35 Joint Strike Fighter, the most expensive weapons system in history. The world’s largest defense contractor counts on Northrop Grumman Corporation (NYSE:NOC) to make the fuselage and U.K.-based BAE Systems, which has a large foothold in the U.S., to make the plane’s tail.
The F-35’s economic weight doesn’t stop there. According to Lockheed, there are more than 1,400 domestic suppliers in 46 states and Puerto Rico along with a fair number of foreign ones.
These companies include high-profile names such as United Technologies Corporation (NYSE:UTX), which makes the F-35’s engines, to lesser-known firms like L-3 Technologies Inc (NYSE:LLL), which produces the plane’s cockpit displays.
The same holds true for every defense contract.
Prime contractors bask in the light of publicity while their “subs” toil in the background providing mundane but necessary services like IT support. It gets confusing because contractors compete and collaborate one another simultaneously. The jargon doesn’t help matters either.
Remember, that there are Pentagon contractors that supply every item imaginable to the military, including toilet paper. Nonetheless, given the Trump administration’s plan to significantly ratchet up defense spending, the rising tide will lift both well-known and “under the radar” contractors that I have highlighted below. They are in no particular order and I consider them all to be defense stocks to buy.
Defense Stocks to Buy: L-3 Technologies Inc (LLL)
LLL does everything from providing the Air Force’s KC-10 aircraft, fuzing and ordnance products for U.S. Army and Air Force, secure networked communication systems to the U.S. Department of Defense and night vision equipment to the Australian Defense Force. It also has a commercial aviation and airport security businesses.
After struggling in recent years, LLL stock appears to be getting its mojo back. The company recently reported its second straight earnings beat on the top and bottom line. Before that, the company had disappointed Wall Street in four out of five quarters.
LLL expect to generate double-digit profit margins in 2017. Although the company has been growing from acquisitions, it posted an impressive 11% organic growth rate. It’s a stock that’s worth adding to even conservative portfolios.
Defense Stocks to Buy: FLIR Systems, Inc. (FLIR)
FLIR Systems, Inc. (NASDAQ:FLIR) is a leading provider of defense electronics like infrared cameras and laser designators that emit a beam of energy used by the military for precision-guided munitions.
During the most recent quarter, FLIR has some good news and bad news. On the plus side, the company posted its highest level of operating cash flow since 2013 and the company’s U.S. government business, which represents 25% of sales, is growing for the first time since 2014.
Unfortunately, margins didn’t meet the company’s expectations. CEO Andrew Teich, however, recently vowed to Wall Street analysts to “improve margins in all of our businesses” and threw a bone to shareholders by increasing FLIR’s dividend by 25%.
Teich is retiring and is being replaced by ex-Stanley Black & Decker, Inc. (NYSE:SWK) executive Jim Cannon, who will take the job next month.
Defense Stocks to Buy: CACI International Inc (CACI)
CACI International Inc (NYSE:CACI) provides information solutions and services including cybersecurity services for both military and civilian government agencies. Recent contracts include a deal potentially worth $6 billion with the Pentagon’s Defense Logistics Agency.
CACI won a record $1.4 billion in contracts during the most recent quarter and CEO Ken Asbury is feeling optimistic telling Wall Street analysts during the recent earnings conference call: ‘The stated administration priorities for increased defense and national security spending border protection, space resiliency an evolving and persistent cyber requirements aligned very well with CACIs position in the marketplace.”
Defense Stocks to Buy: Orbital ATK Inc (OA)
Orbital ATK Inc (NYSE:OA) provides launch vehicles, satellites along with launch vehicles used by missiles and is also the military’s leading provider of munitions. It also makes commercial satellites.
The weakness in the commercial satellite market has been offset by gains on the government side of the business. Defense is expected to have a “banner year” and OA appears to have shaken off accounting issues that dogged the stock in recent years.
In a recent note to clients, SunTrust noted: “The company is aligned to the more attractive and faster-growing missiles, munitions, propulsion, and satellite communications portion of the budget, all of which should help to accelerate top-line growth in the coming periods.”
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.