The defense industry is among the largest industries due to the intensity of its infrastructure and manufacturing activities and the recent international conflicts and other geopolitical rivalries across the world have rapidly fueled the market demand.
Given the industry’s rosy prospects, it could be wise to buy fundamentally strong defense stocks Northrop Grumman Corporation (NOC), General Dynamics Corporation (GD), and Lockheed Martin Corporation (LMT) amid rising geopolitical concerns.
Geopolitical rivalries including brewing trade battles between the US and China, Russia’s invasion of Ukraine, conflicts between Israel and Hamas, and the ongoing threats from Iran and North Korea have raised security concerns globally. These security concerns are surpassing inflation and emerging as the biggest worry for sovereign wealth funds and central banks.
Ukraine's war has instated the need for a robust defense industry to combat critical circumstances and operate efficiently. U.S. European Command's top official said, “The sheer size and scale of the conflict between Russia and Ukraine necessitates that the U.S. defense industrial base continues to evolve to meet potential future challenges of similar proportion.”
The Defense Department’s fiscal year 2025 budget request of about $849.8 billion was emphasized broadly on defending the nation, caring for service members and their families, and strengthening relationships with like-minded U.S. partners and allies. The department remained focused on investing in cutting-edge capabilities and modernization of its tools and equipment.
The United States aerospace and defense market size is expected to reach $656.93 billion by 2029, expanding at a CAGR of 5.8% during the forecast period (2024-2029) driven by an increase in armed forces' procurements, upgradation activities to counter emerging threats, and adoption of advanced technologies like 3D printing, artificial intelligence, and big data analytics.
Given these favorable industry trends, let’s look at the fundamentals of the three Air/Defense Services stocks, beginning with the third choice.
Stock #3: Northrop Grumman Corporation (NOC)
NOC operates as an aerospace and defense technology company internationally. The company operates through the Aeronautics Systems segment; Defense Systems segment; Mission Systems segment; and Space Systems segment.
On August 12, NOC demonstrated the design and structure of its 2024 Solid Motor Annual Rocket Technology Demonstrator solid rocket motor case through an innovative modular tooling approach for manufacturing large composite solid rocket motor (SRM) cases.
The implementation of modular tooling can potentially reduce SRM development costs and lead times by over 50% by eliminating the procurement of long lead tooling and enabling rapid progression from design to manufacturing.
During the second quarter that ended June 30, 2024, NOC’s total sales increased 6.7% year-over-year to $10.22 billion. Its total operating income rose 12.7% from the year-ago value to $1.09 billion. The company’s net earnings and EPS came in at $940 million and $6.36, indicating growths of 15.8% and 19.1% over the prior year’s quarter, respectively.
Furthermore, the company’s free cash flow rose 79.7% from the year-ago value to $1.10 billion.
Street expects NOC’s revenue and EPS for the fourth quarter (ending December 2024) to increase 2% and 3.2% year-over-year to $10.85 billion and $6.47, respectively. Also, the company topped the consensus revenue and EPS estimates in all of the trailing four quarters.
Shares of NOC have surged 15.5% over the past month and 17% over the past year to close the last trading session at $502.38.
NOC’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has a B grade for Momentum, Sentiment, and Stability. Within the Air/Defense Services industry, NOC is ranked #16 out of 70 stocks.
Click here to access additional ratings of NOC for Quality, Growth, and Value.
Stock #2: General Dynamics Corporation (GD)
GD operates as an aerospace and defense company globally. The company operates in four segments: Aerospace; Marine Systems; Combat Systems; and Technologies. It produces and sells business jets; and provides aircraft maintenance and repair, management, aircraft-on-ground support and completion, charter, staffing, and fixed-base operator services.
On August 5, GD’s business unit, General Dynamics Electric Boat was awarded a $1.3 billion contract modification enabling Electric Boat to purchase long lead time materials for Virginia Class Block VI submarines as specified in the U.S. Department of Defense contract award.
On June 7, GD’s General Dynamics Land Systems was awarded a contract along with its joint venture partner Marshall Canada to provide the Canadian Armed Forces (CAF) a new fleet of light and heavy logistics vehicles. The granted contract totals $2.58 billion Canadian ($1.88 billion).
GD’s revenue for the second quarter that ended June 30, 2024, increased 18% year-over-year to $11.98 billion and its operating earnings grew 20.2% from the year-ago quarter to $1.16 billion. The company’s net earnings amounted to $905 million and $3.26 per share, up 21.6% and 20.7% over the prior year’s quarter, respectively.
In addition, the company’s free cash flow rose 18.1% from the year-ago value to $613 million.
Analysts expect GD’s revenue and EPS for the third quarter (ending September 2024) to increase 15.1% and 22.6% year-over-year to $12.17 billion and $3.73, respectively. Moreover, the company has surpassed the consensus revenue estimates in each of the trailing four quarters.
GD’s shares have gained 9.4% over the past six months and 29.1% over the past year to close the last trading session at $292.20.
GD’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
GD has a B grade for Momentum, Growth, and Stability. Within the Air/Defense Services industry, GD is ranked #8 among 70 stocks.
In addition to the POWR Ratings we’ve stated above, we also have GD ratings for Sentiment, Quality, and Value. Get all GD ratings here.
Stock #1: 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 internationally. It operates through Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space segments.
On August 9, LMT delivered the first of five C-130J Super Hercules tactical airlifters to the New Zealand Ministry of Defence and New Zealand Defence Force which embarked on the enhanced tactical airlift capability for New Zealand.
On July 23, LMT’s Skunk Works®, its renowned Advanced Development Programs division, and KX, a global leader in vector-based, time-series data management, announced a new collaboration for the evolution of Open Mission System architectures.
LMT’s net sales increased 8.6% from the prior year’s quarter to $18.12 billion for the second quarter that ended June 30, 2024, and its consolidated operating profit grew marginally from the year-ago value to $2.15 billion. The company’s adjusted net earnings came in at $1.70 billion for the quarter. Its adjusted EPS of $7.11 reflects an increase of 5.6% from the prior year’s quarter.
Additionally, the company’s free cash flow increased 95.3% year-over-year to $1.51 billion.
According to the company’s 2024 financial outlook, LMT expects net sales between $70.50 billion and $7150 billion. Its business segment operating profit is expected to be $7.35 billion - $7.50 billion. Also, the company's EPS is expected to range from $26.10 - $26.60, and free cash flow is expected to range from $6 billion to $6.30 billion.
Analysts expect LMT’s revenue for the first quarter (ending March 2025) to increase 2.5% year-over-year to $17.63 billion and its EPS is estimated to increase 4.7% year-over-year to $6.63 for the same period. Moreover, the company surpassed the consensus EPS and revenue estimates in all four trailing quarters.
LMT’s stock has soared 31.2% over the past six months and 24.3% over the past year to close the last trading session at $559.42.
LMT’s POWR Ratings reflect its robust outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
LMT has a B grade for Sentiment, Momentum, Stability, and Quality. It has topped among the 70 stocks in the same industry.
Click here to access additional LMT ratings for Value and Growth. Top of Form
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LMT shares were trading at $562.84 per share on Wednesday afternoon, up $3.42 (+0.61%). Year-to-date, LMT has gained 25.94%, versus a 14.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Rjkumari Saxena
Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.
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