Rising geopolitical risks have made the defense industry a safe harbor during this bear market. While several nations eye bigger defense budgets and hard spending targets amid the war in Ukraine. We think it could be wise to scoop up the shares of fundamentally sound defense stocks Lockheed Martin Corporation (LMT), Textron Inc. (TXT), and MSA Safety Incorporated (MSA) to safeguard your portfolios with substantial returns.
With the Russia-Ukraine conflict causing increased geopolitical tensions, several countries increased their defense spending. Amid the persistent threat of terrorism, NATO Secretary-General Jens Stoltenberg urged the 30 member countries to commit to spending at least 2% of their Gross Domestic Product (GDP) on defense.
NATO allies in Europe and Canada increased defense spending for the eighth consecutive year in 2022, adding around $350 billion to their budgets. In addition, according to the budget proposal released recently by the Biden administration, the defense spending would surge to $842 billion in the fiscal year 2024, up 3.2% over 2023.
As the war crosses its one-year mark and a nuclear threat grows, the demand for American-made firearms, military aircraft, explosives, and vehicles has skyrocketed. The spending plan also includes $37.70 billion for the defense department to continue modernizing the U.S. nuclear arsenal.
Enhanced defense spending would drive the demand for weapons, thereby creating lucrative opportunities for the companies in this space to boost their revenues. Furthermore, the defense market is expected to grow to $718.12 billion in 2027 at a CAGR of 5.6%.
Investor’s interest in defense stocks is evident from the SPDR S&P Aerospace & Defense ETF’s (XAR) 9.8% returns over the past six months. Therefore, investors looking to capitalize on the defense industry’s long-term growth prospects could consider investing in LMT, TXT, and MSA.
Lockheed Martin Corporation (LMT)
LMT is a security and aerospace company engaged in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. It operates through four segments: Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space.
Recently, LMT won a contract of $214.50 million for the AEGIS system offered by the Naval Sea Systems Command in Washington, DC. The company continues to see a steady inflow of orders involving this combat system due to its remarkable features that are well-suited for any military mission. As a result, LMT's revenue from the combat system should increase.
On March 7, LMT, Korea Aerospace Industries, and Red 6 Aerospace announced a new partnership to deliver advanced 21st Century Security capabilities across a spectrum of training and combat aircraft.
OJ Sanchez, Vice President and General Manager of Integrated Fighter Group at LMT, said, "Lockheed Martin has made significant advances across the board in digital engineering and open architectures during the past few years, as well as strategic partnerships. These are enabling us to accelerate development, production, upgrades, responsiveness, and sustainment across our platforms.”
In the fiscal fourth quarter that ended December 31, 2022, LMT’s net sales increased 7.1% year-over-year to $18.99 billion. The company’s non-GAAP net earnings rose 1.7% year-over-year to $2.01 billion, while its non-GAAP EPS increased 7.9% year-over-year to $7.79.
Analysts expect LMT’s EPS and revenue to increase 1.1% and 2.9% year-over-year to $6.39 and $15.89 billion, respectively, for the fiscal second quarter (ending June 30, 2023). It has a commendable earnings surprise history, surpassing the consensus EPS estimates in three of the four trailing quarters.
Over the past six months, the stock has gained 12.9% to close the last trading session at $475.85.
LMT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Among the 73 stocks in the Air/Defense Services industry, it is ranked #8. LMT is also rated B in Quality, Stability, and Sentiment. To see additional POWR Ratings for Growth, Value, and Momentum for LMT, click here.
Textron Inc. (TXT)
TXT engages in the aerospace, defense, and manufacturing businesses. Its segments include Textron Aviation; Bell; Textron Systems; Industrial; and Finance. The company builds and sells commercial jets, military trainers, and defense aircraft. It also offers finance for new and pre-owned aircraft and bell helicopters.
On February 22, TXT declared a quarterly dividend of $0.02 per share on the company’s common stock, payable to its shareholders on April 1, 2023. Its annual dividend of $0.08 yields 0.11% at the current price level. It has a four-year average dividend of 0.16%.
On February 16, 2023, Textron Aviation, a division of TXT, was awarded the Multi-Engine Training System (METS) contract by Naval Air Systems Command (NAVAIR) following a full and open competition. This reflects the company’s strong performance and robust demand over its peers.
Last year in December, Textron Aviation announced that Aerus, a new regional airline in Mexico, would begin operations with the purchase of two 19-passenger configurations of Cessna SkyCourier twin-engine turboprops and four Cessna Grand Caravan EX turboprops. This could aid in the company’s growth and boost its revenue stream.
TXT’s total revenue increased 9.5% year-over-year to $3.64 billion for the fiscal fourth quarter that ended December 31, 2022. In addition, the company’s net income grew 9.2% from the year-ago to $226 million, while its EPS increased 15.1% year-over-year to $1.07.
The consensus EPS estimate of $0.98 for the first quarter (ending March 31, 2023) represents an 11.6% increase year-over-year. The consensus revenue estimate of $3.15 billion for the current quarter indicates a 5% increase from the same period last year. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in three of four trailing quarters.
Over the past six months, the stock has gained 7.8% to close the last trading session at $71.01.
TXT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system.
It has a B grade for Value and Quality. Within the same industry, it is ranked #3. Click here to see the additional POWR Ratings for EXTR (Growth, Stability, Sentiment, and Momentum).
MSA Safety Incorporated (MSA)
MSA is engaged in the development, manufacture, and supply of safety products and software that protect people and facility infrastructures. It serves distributors and end-users through indirect and direct sales channels. The company offers its product under the V-Gard, Cairns, and Gallet brand names.
On February 3, the company declared its first quarter dividend of $0.46 per share on the common stock, payable on March 10, 2023. Its annual dividend of $1.84 yields 1.35% at the current price level. The company’s dividend payouts have increased at a 3.1% CAGR over the past three years and a 5.6% CAGR over the past five years. MSA has a record of 22 years of consecutive dividend growth.
On January 12, MSA inaugurated its EMEA Global Business Services Center in Warsaw. This newly designed business "hub" is located in the city-center and will centralize a wide range of business functions that support the company's international business goals.
For the fiscal fourth quarter that ended on December 31, 2022, MSA’s net sales increased 8% year-over-year to $443.25 million. Its gross profit grew 10.7% from the year-ago value to $197.25 million, while its adjusted earnings increased 7.5%year-over-year to $70.93 million. Also, the company’s adjusted EPS came in at $1.80, up 7.8% year-over-year.
Street expects MSA’s EPS and revenue to increase 2.1% and 7.2% year-over-year to $1.32 and $399.27 million, respectively, for the fiscal second quarter (ending June 2023). The company surpassed the EPS and revenue estimates in each of the trailing four quarters, which is promising.
The stock has gained 10.9% over the past six months to close the last trading session at $135.94.
MSA’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
It also has a B grade for Quality, Sentiment, Momentum, and Stability. In the same industry, it is ranked #7 of 73 stocks. Click here to see the other ratings of MSA for Growth and Value.
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LMT shares were trading at $476.61 per share on Friday afternoon, up $0.76 (+0.16%). Year-to-date, LMT has declined -1.41%, versus a 1.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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