Last year, global military expenditure increased by 3.7% in real terms to touch new highs of $2.24 trillion. It’s noteworthy that military spending in Europe witnessed the steepest year-on-year increase in the last 30 years. It goes without saying that the catalyst for record spending is rising geopolitical tensions globally. From an investment perspective, the implication is that defense stocks are likely to create value in the coming years.
An important point about defense spending is that it’s immune to economic downturns. Global defense spending increased even during the pandemic year. Given the fact that there are several points of friction globally, I would recommend buying quality defense stocks and holding for the long term.
Estimates through 2030 indicate sustained spending growth and defense companies are positioned to benefit. This column discusses three defense stocks that look attractive from a valuation and fundamental perspective to buy and hold until 2030.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) is among the best defense stocks to buy and hold until 2030. At a forward price-earnings ratio of 16.5, the stock seems poised for a meaningful rally. Further, the stock offers a dividend yield of 2.68% and I am positive for healthy dividend growth in the coming years.
As of Q2 2023, Lockheed reported a record order backlog of $158 billion. With healthy order intake, the backlog is likely to swell further and provide clear revenue and cash flow visibility. The company has already guided for a free cash flow of $6.2 billion for the year. In a base-case scenario, I expect a similar FCF in the coming year.
Another important point to note is that Lockheed expects to return to growth on a year-on-year basis in the coming quarters. This is a key stock upside catalyst and I believe that top-line growth will be sustained as Lockheed invests in innovation-driven solutions.
Leonardo DRS (DRS)
Leonardo DRS (NASDAQ:DRS) stock is an emerging name among defense stocks that can deliver multi-bagger returns. In the last 12 months, DRS stock has trended higher by 75% and I expect the momentum to sustain. The growth stock remains attractive at a forward price-earnings ratio of 25.6.
As an overview, Leonardo is a provider of defense products and technologies. This includes advanced sensing, networking computing, and force protection. Based on the mid-point of 2023 guidance, the company expects revenue and EBITDA of $2.76 billion and $323 million respectively.
An important point to note is that Leonardo reported an order backlog of $4.4 billion as of Q2 2023. This provides clear revenue visibility. Further, with a strong balance sheet, Leonardo is focused on opportunistic merger and acquisition opportunities. I believe that once free cash flows increase substantially, DRS stock will skyrocket.
Northrop Grumman (NOC)
Northrop Grumman (NYSE:NOC) is among the best defense stocks to buy and hold. In the last 12 months, NOC stock has trended lower by 10%. I see this as a golden opportunity to accumulate. The 1.72% dividend yield stock trades at an attractive forward price-earnings ratio of 19.2.
As of Q2 2023, Northrop reported an order backlog of $78.8 billion. The company’s net awards during the quarter were $10.9 billion. With a strong order intake, it’s likely that revenue growth will remain strong.
An important point to note is that Northrop reported $600 million in research and development expenses for Q2. Investment in innovation is a key catalyst for growth across the company’s business segment.
It’s also worth noting that the space systems segment reported 17% year-on-year revenue growth for Q2 2023. The segment was the highest revenue contributor during the quarter. If segment growth remains robust, it will continue to support company-wide sales growth and cash flow upside.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
