The outbreak of war between Israel and the terrorist outfit Hamas has created another major geopolitical flashpoint, this time in the Middle East, even as Russia's invasion of Ukraine nearly two years ago continues to weigh heavily on Europe. U.S. markets have been fairly resilient in response to the news, but some analysts - including Bob Savage of BNY Mellon - are warning that investors may be underestimating the risk of an “extended war" in the heavily besieged Gaza Strip.
Unsurprisingly, these developments have shoved defense stocks into the spotlight on Wall Street. In the immediate days following news of the latest Israel-Hamas conflict, the top 5 U.S. defense contractor stocks gained more than $28 billion in value.
Here, we'll highlight three of analysts' top-rated defense stocks for investors looking to add exposure to the sector amid surging geopolitical tensions.
L3Harris Technologies
Created by the merger of L3 Technologies and Harris Corporation in 2019, L3Harris Technologies (LHX) delivers end-to-end solutions for the defense, aerospace, and communications industries. Its products include aircraft and spacecraft components, electronic warfare systems, and communications systems, among others.
Commanding a current market cap of $33.4 billion and a dividend yield of 2.57%, L3Harris stock is down 14.7% so far in 2023.
Revenues for LHX's second quarter came in at $4.7 billion, up 13.5% from the previous year - helped by an order win of $5.6 billion (up 17% YoY). The company reported EPS of $2.97, which was down 8% from the year prior, but came in above the consensus estimate of $2.94.
Notably, although LHX derives the majority of its revenues from Command, Control, Computers, Communications, Cyber, Intelligence, Surveillance, and Reconnaissance (C5ISR), its product lines are diversified across different platforms and applications. This has resulted in the company having the highest adjusted operating margins (15%) compared to its peers.
Moreover, the company's recent completion of the acquisition of Aerojet Rocketdyne in July 2023 will fortify its presence in the space domain. The acquisition is expected to add $2 billion per year in revenue for LHX. The company already has a significant order backlog of $25 billion.
Analysts have assigned a “Moderate Buy” rating on the stock, with a mean target price of $230.47. This indicates an upside potential of roughly 32% from current levels. Out of 16 analysts covering the stock, 8 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 7 have a “Hold” rating.
RTX Corp
Formerly known as Raytheon Technologies, RTX Corp (RTX) is a leading provider of engineering and manufacturing services to the aerospace and defense industry. Formed in 1985 by a group of engineers who had previously worked for General Electric (GE) and Lockheed Martin (LMT), today the company commands a mammoth market cap of $106.7 billion.
RTX offers shareholders a healthy dividend yield of 3.11%. After accounting for corporate history prior to the United Technologies/Raytheon merger in 2020, the company has increased its dividends consistently for 29 years; however, RTX wasn't grandfathered into Dividend Aristocrat status, so has officially raised only three years in a row.
On the charts, RTX's stock has dropped about 26% on a YTD basis.
In its second-quarter results, RTX reported sales of $18.3 billion, up 12% year over year, while EPS improved 11% to $1.29. The EPS also came in above the consensus estimate of $1.18, just like in the past five quarters. The company also raised its revenue guidance for the year to $73.0 billion-$74.0 billion.
However, lowered free cash flow guidance tied to a defect in Pratt & Whitney engines hammered the stock lower after earnings.
RTX has a sizeable order book of $185 billion, including $73 billion of defense and $112 billion of commercial contracts. Also, the company recently secured contracts worth around $800 million, suggesting the defect issue hasn't impacted its standing with key clients.
Analysts have a “Moderate Buy” rating on the stock and a mean target price of $88.70 - denoting an upside potential of about 21% from current levels. Out of 16 analysts covering the stock, 6 have a “Strong Buy” rating, 8 have a “Hold” rating, 1 has a “Moderate Sell” rating, and 1 has a “Strong Sell” rating.
General Dynamics
We conclude our list with aerospace and defense conglomerate General Dynamics (GD). The oldest company in the list, having been founded in 1899, General Dynamics designs, manufactures and integrates various advanced technology systems and products.
Commanding a market cap of $64.92 billion, General Dynamics also offers shareholders a dividend yield of 2.21%. Notably, the company has raised dividends consistently for 29 years, making it a Dividend Aristocrat.
GD is off 1.6% on a YTD basis.
In its latest quarterly results, General Dynamics reported revenues of $10.1 billion, up 10.5% from the prior year. A 4.3% yearly increase in order backlog to record-high levels of $91.4 billion aided the revenue growth. EPS slipped by almost 2% from the previous year to $2.70, but came in well above the consensus estimate of $2.56. This has been a regular occurrence for General Dynamics, as its EPS has surpassed expectations in each of the past five quarters.
Further, the company's net debt levels actually eased from the beginning of the year. Coupled with a 19.3% yearly rise in free cash flows, this suggests sound fiscal management practices.
Moreover, General Dynamics has continued to win government contracts, which remains a stable source of revenue. Recently, it secured a $768.7 million fixed-price contract from the U.S. Army. Other contracts in the pipeline include $580M for intelligence and homeland security, $385M for Navy training support services, and $185M to manufacture and deliver continued radar support.
Analysts have assigned a “Strong Buy” rating to the stock, with a mean target price of $268.07. This denotes an upside potential of about 12.7% from current levels. Out of 15 analysts covering the stock, 11 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 3 have a “Hold” rating.
