A substantial transformation is sweeping across the geopolitical conflict landscape. Persistent, large-scale clashes are supplanted by the ones involving more parties than we have seen in recent years. The growing intensity of ongoing and potential cross-border disputes has expanded the scope of military engagement, enhancing demand for cutting-edge, high-cost defense equipment.
As nations worldwide hike defense spending amid rising geopolitical instability, quality defense stocks General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), and Woodward, Inc. (WWD) could be solid buys this month.
Growing geopolitical instabilities and the increasing complexity of warfare have fueled a significant expansion in the air defense system market worldwide. A spike in global defense budgets can be attributed to events like the Russia-Ukraine conflict, which has prompted nations to rethink their military expenditure.
As per the Stockholm International Peace Research Institute, global military spending reached $2.24 trillion in 2022, with the U.S. as the top contributor, accounting for 39% of the global military expenditure.
The ongoing Israel-Hamas conflict and anxieties over its potential escalation in the Middle East are projected to propel defense stocks. BofA Securities predicts an imminent investment surge in the Department of Defense owing to this ongoing strife. The supply of various defense facilities to support Ukraine and Israel by the U.S. could further enhance the performance of major U.S.-based defense contractors.
As geopolitical discord escalates, global focus has shifted toward securing territories against potential hazards, emphasizing fortified air defense capabilities. The fiscal 2024 National Defense Authorization Act recommends $886.3 billion for U.S. defense expenditure, up 3.3% from 2023 levels.
Driven by technologically advanced weaponry, advanced aircraft, and the increasing integration of innovative technologies into defense systems, the global aerospace and defense market is projected to reach $67.42 billion by 2030, growing at a CAGR of 7.1%. Investors’ interest in defense stocks is evident from the SPDR S&P Aerospace & Defense ETF’s (XAR) 19.1% returns over the past year.
In light of these encouraging trends, let's look at the fundamentals of the three Air/Defense Services stocks, beginning with number 3.
Stock #3: General Dynamics Corporation (GD)
GD operates as an aerospace and defense company worldwide. It operates through four segments: Aerospace; Marine Systems; Combat Systems; and Technologies.
On December 6, GD’s board of directors declared a regular quarterly dividend of $1.32 per share on the company's common stock, payable on February 9, 2024. The company has a record of paying dividends for 32 consecutive years.
Its annualized dividend rate of $5.28 per share translates to a dividend yield of 2.10% on the current share price. Its four-year average yield is 2.42%. GD’s dividend payments have grown at CAGRs of 6.5% and 7.5% over the past three and five years, respectively.
On November 13, General Dynamics Information Technology (GDIT) received a $2.5 billion indefinite-delivery, indefinite-quantity (IDIQ) contract by the Indian Health Service (her) to modernize its electronic health record (EHR) system. The 10-year contract has a five-year base period with five option years.
Under the contract, GDIT will replace the agency's health record and patient system with a new cloud-based enterprise EHR system from Oracle Health. This should bode well for GD.
GD’s trailing-12-month cash from operations of $4.18 billion is significantly higher than the industry average of $293.14 million. Its trailing-12-month ROCE, ROTC, and ROTA of 17.56%, 7.97%, and 6.17% are 42.8%, 15.9%, and 24.8% higher than the industry averages of 12.32%, 6.87%, and 4.94%, respectively.
Over the past three and five years, GD’s revenue grew at CAGRs of 2.8% and 4%, respectively, while its diluted EPS grew at 2.8% and 3.2% CAGRs over the same periods.
In the fiscal third quarter that ended October 1, 2023, GD’s revenue increased 6% year-over-year to $10.57 billion, while operating earnings stood at $1.06 billion. Moreover, its free cash flow increased 6.4% from the prior-year quarter to $1.09 billion.
For the same quarter, net earnings and earnings per share stood at $2.31 billion and $8.39, respectively. As of October 1, 2023, its total current assets stood at 22.78 billion, compared to $21.06 billion as of December 31, 2022.
Street expects GD’s revenue and EPS for the fiscal fourth quarter ending December 2023 to increase 12.8% and 16.5% year-over-year to $12.24 billion and $4.17, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 19.5% over the past six months to close the last trading session at $251.95. Over the past three months, it has gained 15.6%.
GD’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
GD has a B grade for Momentum and Stability. Within the 71-stock Air/Defense Services industry, it is ranked #11.
Beyond what we’ve stated above, we have also rated the stock for Growth, Value, Sentiment, and Quality. Get all ratings of GD here.
Stock #2: Lockheed Martin Corporation (LMT)
LMT is a security and aerospace company that conducts 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.
On November 14, LMT opened a $16.5 million engineering facility at its Huntsville campus, introducing more capabilities for missile defense innovation in North Alabama. This facility provides increasing opportunities for growth and advanced capability in North Alabama at the company's Huntsville campus.
On October 19, The Republic of the Philippines Department of National Defense announced the acquisition of three new C-130J-30 Super Hercules tactical airlifters from LMT through Direct Commercial Sale.
On October 6, the company's board authorized the repurchase of its common stock up to an additional $6 billion, increasing the total authorization for potential future common stock repurchases to $13 billion.
Its annualized dividend rate of $12.60 per share translates to a dividend yield of 2.80% on the current share price. Its four-year average yield is 2.62%. LMT’s dividend payments have grown at CAGRs of 7.4% and 8.2% over the past three and five years, respectively.
LMT’s trailing-12-month cash from operations of $7.48 billion is significantly higher than the industry average of $293.14 million. Its trailing-12-month EBIT and net income margins of 13.40% and 10.29% are 38.4% and 69.4% higher than the industry averages of 9.68% and 6.08%, respectively.
Over the past three and five years, its revenue grew at CAGRs of 1.8% and 4.9%, respectively, while its total assets grew at 3.7% and 4.5% CAGRs over the same periods.
In the fiscal third quarter that ended September 24, 2023, LMT’s net sales increased 1.8% year-over-year to $16.88 billion, while gross profit stood at $2.05 billion. Moreover, its free cash flow stood at $2.53 billion.
For the same quarter, adjusted net earnings and adjusted EPS stood at $1.70 billion and $6.77, respectively. As of September 24, 2023, total current assets stood at 23.32 billion, compared to $20.99 billion as of December 31, 2022.
Street expects LMT’s revenue for the fiscal year ending December 2023 to increase 1% year-over-year to $66.62 billion. Its EPS is expected to be $27.19. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters.
The stock has gained marginally intraday to close the last trading session at $449.41. Over the past three months, it has gained 6%.
LMT’s POWR Ratings reflect its positive prospects. The stock has an overall B rating, equating to Buy in our proprietary rating system.
It has a B grade for Momentum, Stability, and Quality. It is ranked #10 within the same industry.
Click here to see the other ratings of LMT for Growth, Value, and Sentiment.
Stock #1: Woodward, Inc. (WWD)
WWD designs, manufactures, and services control solutions for the aerospace and industrial markets worldwide. The company operates in the Aerospace and Industrial segments.
During fiscal 2023, $177 million was returned to stockholders through $51 million of dividends and $126 million under our stock repurchase program.
On December 4, WWD paid the stockholders a quarterly cash dividend of $0.22 per share. The company has paid dividends for 31 consecutive years. Its annualized dividend rate of $0.88 per share translates to a dividend yield of 0.65% on the current share price.
Its four-year average yield is 0.67%. WWD’s dividend payments have grown at CAGRs of 18.9% and 9.1% over the past three and five years, respectively.
WWD’s trailing-12-month cash per share of $2.30 is 6.5% higher than the industry average of $2.16. Its trailing-12-month EBIT and net income margins of 10.45% and 7.97% are 8% and 31.2% higher than the industry averages of 9.68% and 6.08%, respectively.
Over the past three and five years, its revenue grew at CAGRs of 5.3% and 4.6%, respectively, while its operation income (EBIT) grew at 1.3% and 1.6% CAGRs over the same periods.
In the fiscal fourth quarter that ended September 30, 2023, WWD’s net sales and adjusted EBIT increased 21.4% and 70.6% year-over-year to $777.07 million and $108.42 million, respectively. Moreover, its adjusted EBITDA stood at $138.86 million, up 49.5% from the year-ago quarter.
For the same quarter, adjusted net earnings and adjusted net earnings per share increased 60.6% and 58.3% from the prior-year quarter to $82.65 million and $1.33, respectively.
Street expects WWD’s revenue and EPS for the fiscal first quarter ending December 2023 to increase 21.8% and 134.4% year-over-year to $753.70 million and $1.15, respectively. The company surpassed consensus revenue estimates in each of the trailing four quarters and EPS estimates in three of the trailing four quarters.
The stock has gained 35.3% over the past nine months to close the last trading session at $134.81. Over the past year, it has gained 43.6%.
WWD’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.
WWD has an A grade for Growth and a B for Momentum, Sentiment, and Quality. It is ranked #4 within the same industry.
To see WWD’s additional POWR Ratings for Value and Stability, click here.
What To Do Next?
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LMT shares were unchanged in premarket trading Thursday. Year-to-date, LMT has declined -5.12%, versus a 20.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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