Defense stocks strongly support the U.S. Army in the biggest procurement cycle since the Reagan administration in the 1980s.
The defense stocks’ strong returns in 2022 gained a heightened boost on Dec. 29 when President Biden signed a $1.7 trillion federal spending bill that provided the U.S. Department of Defense (DoD) $797.7 billion in discretionary funds for fiscal year 2023, up $69.3 billion, or 9.5%, from fiscal year 2022. The amount appropriated for the national defense topped the president’s DoD budget request by $36.1 billion.
The spending is intended to develop, maintain and equip the U.S. military and intelligence community. The legislation also expanded weapons procurement by $5.9 billion, a $1.1 billion increase from President Biden’s request, Russia’s war against Ukraine rages.
In addition, China is increasing its threatening military flyovers and other provocations against Taiwan, Japan, South Korea and other countries in the Asia-Pacific region. Bipartisan support for enhanced U.S. defense spending resembles what occurred during President Reagan’s pro-military administration that began with his inauguration on January 20, 1981, ending with his second term on January 20, 1989.
Defense Stocks Strongly Support the U.S. Army: Manufacturer of Advanced Composites
The defense stocks to serve the U.S. Army outperformed the overall market in 2022 by jumping as the major indices fell. Momentum seems intact for 2023 on the heels of President Biden signing legislation to enhance U.S. warfighting capabilities.
On of the defense stocks that is strongly supporting the U.S. Army is Hexcel (NYSE: HXL), a Stamford, Connecticut, company engaged in the space and defense market. Hexcel manufactures advanced composites used in commercial helicopters and in military aircraft. It currently is qualified to supply materials to a broad range of more than 100 helicopter, military aircraft and space programs.
Chart courtesy of www.stockcharts.com
Defense Stocks Strongly Support the U.S. Army: Hexcel
Hexcel’s top 10 programs by revenues represent about 56% of sales for its Space and Defense business segment. Key programs include the F-35 joint strike fighter, or JSF, Sikorsky CH53K King Stallion, V-22 Osprey tilt rotor aircraft, UH60M Blackhawk, AH-64 Apache, A400M military transport, European Fighter Aircraft (Typhoon), F/A-18E/F (Hornet), Rafale fighter jet, and MH90 Enforcer.
Space applications for advanced composites include solid rocket booster cases, fairings and payload doors for launch vehicles, and bus and solar arrays for military and commercial satellites. Hexcel also produces advanced composites for helicopter blades. Numerous new helicopter programs in development, as well as upgrade or retrofit programs, have an increased reliance on composite materials products such as carbon fiber, prepregs and honeycomb core to improve blade performance.
BoA Global Research placed a buy recommendation on Hexcel. The investment firm placed a $70 price objective on the stock.
Jim Woods, a seasoned stock picker and the leader of the Bullseye Stock Trader advisory service, recommends stocks and options that include defense investments. Woods, who concurrently heads the Intelligence Report investment newsletter, is a former Army paratrooper who has strategically invested in defense stocks profitably. In fact, he recently recommended the stock and options in a traditional defense investment.
Paul Dykewicz meets with Jim Woods, head of Bullseye Stock Trader.
Defense Stocks Strongly Support the U.S. Army with Joint Strike Fighter: Howmet Aerospace
Howmet Aerospace (NYSE: HWM), an advanced engineering company in Pittsburgh, received a buy recommendation and a $45 a share price target from BoA Global Research. The JSF hits Mach 1.6 under the thrust of possibly the most advanced engine on earth. It is built with cutting-edge materials, integrated airframe design and next-generation avionics to enable this fifth-generation fighter to operate with unprecedented stealth, speed and agility in air-to-air and air-to-ground combat.
In developing this complex machine, Lockheed Martin (NYSE: LMT) turned to Howmet Aerospace for many of its critical parts. These include single-piece forged aluminum bulkheads that form the “backbone” of the aircraft structure and save 300 to 400 pounds per jet, while cutting costs by 20%. The fighter jet also has titanium bulkheads and uses titanium to manufacture other airframe structures for all three F-35 JSF variants. Howmet supplies single-crystal, nickel-based superalloy blades and vanes that operate in environments hotter than the melting point of the metal to propel the engine.
Joint Strike Fighter Is a Multirole Combat Jet Capable of Flying at Mach 1.6.
To hold together the design, Howmet’s vibration-resistant fasteners are engineered to endure the most extreme G-forces and performance requirements. From nose to tail, Howmet Aerospace helps its customers meet aggressive weight, range and fuel efficiency targets to enable the F-35 to do what other military aircraft cannot.
Woods also teams up with Mark Skousen, the head of the Forecasts & Strategies investment newsletter, on the Fast Money Alert trading service that invests in stocks and options. Skousen queried SpaceX and Tesla (NASDAQ: TSLA) founder Elon Musk at the annual Baron Investment Conference held in New York on Nov. 4. Skousen, who also is a Chapman University Presidential Fellow and recently was named the first Doti-Spogli Chair in Free Enterprise at its Argyros School of Business and Economics, recommended Tesla with Woods in Fast Money Alert earlier this month due to the stock’s reduced valuation, after plunging 64.4% in the last year through Jan. 17.
Mark Skousen, a scion of Ben Franklin and chief of Fast Money Alert, meets Paul Dykewicz.
Defense Stocks Strongly Support the U.S. Army: Lockheed Martin
Lockheed Martin Corp. (NYSE: LMT) is the top defense stock that Woods chose to offer attendees at the 2023 MoneyShow selections. LMT is the world’s largest defense contractor, and it has dominated the Western market for high-end fighter aircraft since the F-35 program was awarded in 2001. Lockheed’s largest segment is aeronautics, but the company also offers rotary and mission systems, missiles and fire control and space systems.
In December 2022, the United States was in the process of finalizing plans to provide Ukraine with Patriot missile-defense systems in its war against Russia, and this could be a big revenue driver for LMT. That’s because while the Patriot system is built by Raytheon Technologies (NYSE: RTX), the missiles it fires are made by Lockheed.
Think of the Patriot deal as offering bullish “NewsQ,” i.e., information that can lift stocks, Woods said. Such news can help drive LMT shares higher in 2023, Woods added.
“Yet what I like about LMT is not just the bullish NewsQ, but also its earnings growth and its 2022 share price performance,” Woods commented. “On the earnings front, the company’s recent quarterly and annual earnings per share growth rates are in the top quintile of all companies, and I expect this metric to rise into next year.”
On the share price performance front, LMT’s 2022 gain vaulted it into the top 6% of all companies in terms of relative price strength, Woods commented. Finally, the ongoing Russia/Ukraine war shows the world is still a very dangerous place, and one where conventional warfare in Europe could very well be a reality. As a result, governments must get ready, and that means they need LMT capabilities.
Chart courtesy of www.stockcharts.com
Defense Stocks Strongly Support the U.S. Army: L3Harris Technologies
L3Harris Technologies (NYSE: LHX), a Melbourne, Florida-based defense contractor and information technology services provider, produces C6ISR systems and products, wireless equipment and tactical radios. It also netted a buy recommendation from BofA Global Research. The defense company, consisting of Integrated Mission Systems; Space & Airborne Systems, and Communication Systems, received a $285 price objective from BofA.
The valuation is in line with the median for a pure play defense stock, BofA wrote. However, an improved sentiment on defense spending should sustain a relative valuation slightly above the historical average, the investment firm added.
Potential reasons for the company to beat its price target include winning more business on new and existing programs versus BofA’s current expectations. Risk to the stock includes possible integration of past acquisitions that may put a strain on the company’s cash and impact free cash flow estimates.
Chart courtesy of www.stockcharts.com
MAG Aerospace and L3Harris Technologies provide enhanced intelligence, surveillance and reconnaissance (ISR) aircraft to support the Army’s Theater Level High-Altitude Expeditionary Next Airborne ISR Radar (ATHENA-R) program. The ATHENA-R aircraft, converted Bombardier Global Express 6500s with ISR mission capabilities, will support U.S. Army missions in the U.S. Indo-Pacific Command area. Designed to close the gap between the Army’s medium- and high-altitude ISR aircraft fleet, the ATHENA-R provides longer range, greater endurance, more capacity for bigger payloads and standoff ranges, as well as leading-edge sensor technology.
The partnership with L3Harris will deliver breakthrough C5ISR capability to Army combatant commands, said Joseph Reale, CEO, MAG Aerospace. The two companies will equip the aircraft with new radar and electronic and communications intelligence capabilities. MAG delivers world-class command, control, computers, communications, cyber and ISR service delivery expertise to bring turnkey disruptive technology to U.S. government and allied customers around the world. L3Harris currently operates a Bombardier Global Series jet as part of its Airborne Reconnaissance and Electronic Warfare System (ARES) supporting Army Pacific Command and expands its extensive Army ISR portfolio as part of the L3Harris and MAG ATHENA partnership.
Defense Stocks Strongly Support the U.S. Army: Leidos Holdings
Reston, Virginia-based Leidos (NYSE: LDOS), a science and technology company, has been awarded a prime contracts by the U.S. Army to support the U.S. Army. One example is the Geospatial Center’s (AGC) High-Resolution Three Dimensional (HR3D) Geospatial Information Operation and Technology Integration program. That single-award contract has a total estimated value of $600 million if all options are exercised.
The period of performance for the contract includes a one-year base, as well as three one-year options. Work will be performed predominately in Virginia and other locations.
Chart courtesy of www.stockcharts.com
Leidos, previously known as Science Applications International Corporation, serves the U.S. defense, aviation, information technology and biomedical research industries. The company also provides scientific, engineering systems integration and technical services.
BofA set a price target of $130 on Leidos, forecasting that the company should trade in line in the defense prime contractors amid strong U.S. national security demand for innovative technologies and solutions. The company also has solid free cash flow, countered by a lumpy contract award environment, near-term supply chain pressures and mounting concerns about labor inflation.
Risks to reach the price target include cuts to the U.S. government budget, compared to expectations, increased competition from non-traditional competitors and problems integrating mergers and acquisitions (M&As), hiring the right personnel, containing costs, estimating costs and executing on fixed price contracts. The company also could face reputational risk.
Potential outperformance could come from a better-than-expected federal budget allocated to innovative technologies and modernization, inexpensive and well-integrated M&A activity, along with unexpected capital return to shareholdres through dividends or share buybacks, market share gains, or better-than-forecast margin, BoA wrote.
Defense Stocks Strongly Support the U.S. Army: $600 Million Contract Supports Geospatial Center
General Dynamics (NYSE: GD), a global aerospace and defense company based in Reston, Virginia, is a recommendation of stock picker Jim Woods in his monthly Intelligence Report investment newsletter. He put the dividend-paying defense stock in his Income Multipliers portfolio.
The company produces combat vehicles, nuclear-powered submarines and communications systems to provide safety and security during military missions. General Dynamics employs more than 100,000 people worldwide and generated $38.5 billion in revenue in 2021. Woods noted that the company pays a dividend that currently yields more than 2%.
General Dynamics also received a “buy” recommendation from BofA, which set a price objective of $305, based partly on a 5.0% 2025-2030 growth rate and 2.8% long-term growth rate, as well as increased defense budget expectations. BofA wrote that the company’s defense program provides exposure to land and sea priorities, coupled with its Gulfstream business jet manufacturing segment, offering near-term and medium-term organic growth.
Other pluses are the company’s strong balance sheet and solid cash generation, helping to sustain dividend growth and share repurchases, BofA wrote. Potential downside risks to reaching that price target, according to BofA, are a possible drop in business jet sales due to an exogenous factor and the pricing of business jets in dollars, making the company vulnerable to an unexpected devaluation of the U.S. dollar that could significantly impact orders. Any adverse impact on margins for defense programs and unforeseen government budget cuts could limit growth in the medium- and long-term.
Chart courtesy of www.stockcharts.com
Defense Stocks Strongly Support the U.S. Army: Northrop Grumman
Northrop Grumman (NYSE: NOC), a multinational aerospace and defense technology company headquartered in Falls Church, Virginia, is one of the world’s largest weapons manufacturers and military technology providers with 90,000 employees and $30 billion-plus in annual revenue. It also is a recommendation of BofA and has the potential to rise 20-25% in the next 12-18 months compared to the company’s current share price, said Michelle Connell, a former portfolio manager who heads Dallas-based Portia Capital Management.
Michelle Connell leads Dallas-based Portia Capital Management.
Increased geopolitical tensions do not look likely to end soon and defense stocks should continue to have an allocation in an investor’s portfolio, Connell counseled. Until the “exacerbated pullback” in the markets, defense stocks such as Northrop Grumman had performed very well, she added.
Northrop Grumman stands out from the defense pack, Connell said, partly due to:
-Developing the first B-21 bomber for the Air Force, after the company passed its first round of tests about the efficacy of the bomber that is expected to be released in 2023.
-Preparing next-generation ballistic missile systems under the name of Sentinel.
-Growing three-year revenue and profits strongly, even though sales were weak in the last quarter due to shortages of labor and supply chain issues that could continue into the rest of 2022.
Interested buyers of the stock may want to wade in with purchases and take a first step before July 29 to receive the next dividend payment, Connell advised.
Defense Stocks Strongly Support the U.S. Army Amid Institutional Buying
“I take some solace in knowing that before the recent pullback, the stock volume and institutional buying for NOC had increased,” Connell said.
BofA derived a $550 price objective on the stock, partially due to a 4% year over year growth rate for 2025-2030 estimates and a 2.5% long-term growth rate. In addition, the U.S. Defense Budget Authorization has grown at a 1.8% compound annual growth rate (CAGR) in constant dollars since post World War II, BofA’s Epstein wrote.
Northrop Grumman’s growth rate may exceed the industry norm with the most profitable production phase of the B-21 Raider program starting in about 10 years and the U.S. Air Force’s Ground Based Strategic Deterrent (GBSD) entering production at the end of this decade. The GBSD is the replacement weapon system for the aging LGM-30 Minuteman III intercontinental ballistic missile (ICBM) system.
Potential risks to the stock include possible defense program cost overruns and margin contractions. Further stumbles could come from unexpected cancellations to both the company’s commercial and military programs.
Chart courtesy of www.stockcharts.com
China’s COVID Cases Jump After Easing Zero-Tolerance Policy as Defense Stocks Strongly Support the U.S. Army
Satellite images of Chinese cities have shown crowding at crematoriums and funeral homes, with the world’s most populous country waging a battle with a new wave of COVID-19 infections after relaxing its strict pandemic restrictions.
The number of COVID-19 cases has reached a record high in mainland China, according to the European Centre for Disease Prevention and Control (ECDC). However, cases in China reportedly have fallen in recent weeks, but possibly due to reduced availability of tests to detect cases.
The U.S. government began requiring negative COVID-19 tests starting Thursday, Jan. 5, for all passengers seeking to enter the country from China after the latter country’s spike in COVID-19 cases. France and several other countries also mandated clean COVID-19 tests for passengers arriving from China, reflecting global concern that new variants could emerge in the ongoing outbreak.
China has been accused of lacking transparency since the virus emerged in late 2019. Critics contend China may not be sharing data about evolving strains that may spark fresh outbreaks in other countries.
Along with the United States, Japan, India, South Korea, Taiwan and Italy have announced passengers from China will need to test negative for COVID. An internal meeting of China’s National Health Commission estimated that up to 248 million people contracted the coronavirus during the first 20 days of December. COVID-19 still is roaring through cities in China.
Satellite images of Chinese cities have shown crowded crematoriums and funeral homes, with the world’s most populous country battling a new wave of COVID-19 infections after relaxing its strict pandemic restrictions. The number of COVID-19 cases has reached a record high in mainland China, according to the European Centre for Disease Prevention and Control (ECDC). However, cases in China reportedly have fallen in recent weeks, possibly due to reduced availability of tests.
The U.S. government began requiring negative COVID-19 tests starting Thursday, Jan. 5, for all passengers seeking to enter the country from China after the latter country’s spike in COVID-19 cases. France and several other countries also mandated clean COVID-19 tests for passengers arriving from China, reflecting global concern that new variants could emerge.
China has been accused of lacking transparency since the virus emerged in late 2019. Critics contend China may not be sharing data about evolving strains and fresh outbreaks.
Defense Stocks Strongly Support the U.S. Army as Worldwide COVID Cases Reach 667.5 Million
Worldwide COVID-19 deaths soared to 6,726,410 people, with total cases of 667,517,345, Johns Hopkins announced on Jan. 17. COVID-19 cases in the United States totaled 101,724,888, while deaths reached 1,100,595, as of Jan. 17, according to Johns Hopkins University. Until recent news that estimated China had 248 million cases of COVID-19, America had the dreaded distinction as the nation with the most coronavirus cases and deaths.
The U.S. Centers for Disease Control and Prevention reported that 268,556,888 people, or 80.9% the U.S. population, have received at least one dose of a COVID-19 vaccine, as of Jan. 11. People who have completed the primary COVID-19 doses totaled 229,359,062 of the U.S. population, or 69.1%, according to the CDC. The United States also has given a bivalent COVID-19 booster to 45,882,482 people who are age 18 and up, equaling 18.2% as of Jan. 11, up from 17.7% as of Jan. 4, 17.3% as of Dec.28, rising from 16.8% the previous week, up from 16.3% the week before that one and and jumping from 15.5% the preceding week.
Ukraine’s President Volodymyr Zelensky’s secret Dec. 21 flight to Washington, D.C., let him appeal face-to-face to U.S. President Joe Biden to advocate for additional military supplies to defend against Russia’s continuing attacks. Zelensky’s address to a joint session of Congress that evening appears to have swayed many U.S. lawmakers. The surprise visit marked Zelensky’s first international trip since Russia’s invasion.
Russia is continuing its onslaught of intensified strikes that began in October, targeting Ukraine’s energy and civilian infrastructure.
Defense Stocks Strongly Support the U.S. Army Amid Russia’s War Against Ukraine
Most recently, Russia, whose leaders describe their attack of Ukraine that began Feb. 24 as a “special military operation,” are escalating their assault of the Ukrainian city of Bakhmut. One of Russia’s military leaders said his troops had gained control of a nearby city in eastern Ukraine called Soledar.
Defense stocks strongly support the U.S. Army, and are assisting Ukraine in waging a defense against deadly attacks from Russia. Many U.S. weapons have been sent to Ukraine to aid in its defense in the face of unrelenting off Russia’s attacks against them. Kremlin leaders have called up 300,000 conscripts and plans to expand the eligible age for its draft as part of an announced strategy to wage a long-term war that should continue to attract investors to dividend-paying defense investments that focus on protecting freedom around the world.
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Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Special Holiday Offer: Paul is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The uplifting book is great gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for special pricing on multiple-book purchases.