With two significant wars at the moment, you would think the question of which defense stocks to buy would be a topic of interest for investors. However, according to Barron’s, the top five defense stocks: Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), Boeing (NYSE:BA), General Dynamics (NYSE:GD) and RTX (NYSE:RTX) have only gained an average of 30% over the past five years, significantly less than the index itself. That could explain some of the investor reluctance.
Moreover, the industry feels inadvertently unpredictable to many investors, with the potential for government spending priorities to shift based on the administration. Nevertheless, defense stocks, if selected correctly, can be exceptionally defensive for a portfolio. That’s because not all defense stocks rely on large government spending packages to remain competitive, due to the critical nature of the products they sell, like ammo or aircraft maintenance parts.
If you’re interested in defense stocks, here are three to buy to bulletproof your portfolio.
RTX (RTX)
RTX (NYSE:RTX), formerly known as Raytheon Technologies, has three operating segments: Collins Aerospace, Pratt & Whitney, and Raytheon. Collins sells products and services to aircraft manufacturers, airlines, the U.S. government, defense contractors, and independent distributors worldwide. Pratt & Whitney supplies aircraft engines to both commercial and military customers. Lastly, Raytheon manufactures and sells advanced radar detection systems and sensors for missile defense applications.
All three sectors generated around $6.5 billion in revenue in Q1, 2024. However, of the three, Raytheon had the highest operating margin at 15.0%, 230 basis points higher than Collins Aerospace and more than double Pratt & Whitney’s. Together, RTX had total segment sales of $19.79 billion and operating profits of $2.26 billion, both considerably higher than a year ago.
While its shares aren’t cheap, the company continues to grow revenues and operating profits at a decent pace, making it a good long-term hold. It’s also an incredibly relevant producer of defense technologies, as the wars of today depend on missile technology more than ever before.
Heico (HEI)
Heico (NYSE:HEI) was founded in 1957 and today operates two segments: Flight Support Group (60% of revenue) and Electronic Technologies Group (40%).
The Flight Support Group designs and manufactures jet engine and aircraft component replacement parts in accordance with Federal Aviation Administration guidelines. It also repairs, overhauls, and distributes jet engines and aircraft components like avionics and instruments for domestic and foreign commercial air carriers, aircraft repair companies, and military and business aircraft operators.
The Electronic Technologies Group designs, manufactures, and sells various electronic, microwave, and electro-optical products. From the time the current management took control of the business in 1990 through fiscal 2023, its annual revenues have grown from $26 million to nearly $3 billion, a compound annual growth rate (CAGR) of 15%. The CAGR for its net income is even higher at 18%.
Over the past three years, its annualized revenue and operating income growth rate was 18.4%. While analysts are lukewarm about its business, its shares have doubled over the past five years for a reason.
National Presto Industries (NPK)
This last pick is a bit of a wildcard. National Presto Industries (NYSE:NPK). According to MarketWatch, only one analyst covers the small-cap stock, rating it a buy, with a $128 target, 68% higher than where it’s currently trading.
National Presto is one of those stocks you buy and forget about for years because it does a few things rather than specializing in one industry or sector. It operates three businesses: Housewares/Small Appliances (29% of revenue), Defense (70%), and Safety (1%).
Consumers could be familiar with its housewares segment, which makes everything from skillets and griddles to air fryers and rice cookers, even coffee makers. However, it’s the defense segment that gets it into this article.
The company has several subsidiaries under the National Defense Corporation, including AMTEC, which manufactures 40mm ammunition for the U.S. Department of Defense. As I mentioned, defense accounts for nearly three-quarters of its annual revenue and about 84% of its operating profits.
Of the three defense stocks, National Presto is the value play. Its enterprise value of $476 million is 10.5x its EBITDA (earnings before interest, taxes, depreciation, and amortization), way less than RTX (18.6x) and HEI (35.3x).
On the date of publication, Will Ashworth did not have (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.
