- Defense stocks in general are poised to benefit a great deal from geopolitical tensions in the wake of the Russia-Ukraine War
- Raytheon (RTX) should get a big lift from its drone and anti-drone businesses
- Huntington Ingalls’ (HII) backlog reached a record and the company will benefit from greatly increased U.S. spending on its Columbia-class submarine.
- The Pentagon’s spending on Northrop Grumman’s (NOC) B-21 bomber is poised to radically surge.
Two of the most popular sectors now are the energy and defense spaces. For a few reasons, I believe that defense stocks are, on the whole, a better, safer bet for longer-term investors than energy names.
In the short term, because of the volatility of oil prices, energy stocks could easily take a big hit. That’s because many prognosticators believe that the Russia-Ukraine War could soon be over. And in any possible deal between Moscow and the West, Russia could be allowed to resume selling its oil with very few restrictions, causing oil prices to tumble.
On the other hand, the U.S. and European nations, in all likelihood, will not rescind the increases in defense spending that they have instituted in response to the war. If the war ends and a deal is reached between the West and Russia, after all, Western nations will continue to view Moscow as a major threat.
Additionally, if the electric-vehicle revolution accelerates more quickly than expected, oil prices could tumble over the long term.
Three good defense stocks to buy now;
Defense Stocks: Raytheon
As I noted in a column last month on Raytheon (NYSE:RTX) stock, “Ukraine’s successful use of drones in its war against Russia is making them quite popular around the world.” Since Raytheon makes drones and anti-drone systems, the company and its shares are well-positioned to benefit from that trend.
Raytheon’s first-quarter results, announced on April 26, featured earnings per share of $1.15, well above analysts’ average outlook $1.01. And aside from its defense business, Raytheon, which has a significant, commercial aerospace business, is getting a big lift from the rejuvenation of air travel in most of the world.
“The strong commercial aerospace recovery and our focus on operational execution enabled us to deliver both top-line growth and margin expansion year-over-year. As a result, adjusted EPS and free cash flow exceeded our expectations in the first quarter,” said Raytheon CEO Greg Hayes in a statement.
On April 27, research firm Cowen increased its price target on RTX stock to $120 from $115, as Cowen believes that the company has “attractive medium-term prospects in all markets.”
But the company’s future looks very bright, as it won an impressive total of about $2 billion of new contracts in Q1, bringing its backlog to a record total of “approximately $47.9 billion,” representing an all-time record.
And importantly, Huntington-Ingalls reaffirmed its fiscal 2022 cash flow guidance of $300 million to $350 million, while it told the Street to “Expect cumulative FY20-FY24 free cash flow of approximately $3.2 billion.” That’s a really staggering total, considering that the market capitalization of HII stock is only $8.66 billion.
That optimism appears to be warranted, since the Biden administration has proposed increasing the amount of money devoted to “the Columbia-class submarine built by General Dynamics (NYSE:GD) and Huntington Ingalls, would rise to $6.3B from ~$5B,” Seeking Alpha reported on March 28.
Defense Stocks: Northrop Grumman
Like Huntington Ingalls, Northrop Grumman (NYSE:NOC) is poised to be a big winner from the Pentagon’s upcoming budget hikes. According to Seeking Alpha, Northrop’s B21 bomber ” would get $5B in combined research and procurement from ~$2B in the current year.”
In a recent note to investors, Morgan Stanley named Northrop as one of its “45 highest conviction stock picks.” In addition to benefiting from much higher spending on the B21, the company will also benefit from increased U.S. spending on its “Ground Based Strategic Deterrent intercontinental ballistic missile,” Morgan Stanley believes.
Additionally, the company’s space business appears to be performing very well, as the unit’s revenue jumped 13.2% YOY last quarter. Further, Northrop’s overall backlog came in at a very strong $75.8 billion.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.