The U.S. and Iran are at war — even if we’re not calling it that and even if there’s currently a ceasefire in effect. But here’s something you might not have noticed: War doesn’t always mean that defense stocks go up.
In the six weeks since bombs began falling on Iran, shares of major U.S. defense contractors General Dynamics (GD +0.36%), Lockheed Martin (LMT 2.62%), and RTX (RTX +0.29%) — even if RTX, the company formerly known as Raytheon, is only down a fraction of a percent, from $202 to $201.
That’s kind of weird.
Image source: Getty Images.
Harvard weighs in
According to economists at the Harvard Kennedy School, the U.S. is spending $2 billion per day in and around Iran. And 44 days into the conflict, that’s $88 billion — roughly one year’s revenue for RTX and more than either GD or Lockheed makes in a year, according to data from S&P Global Market Intelligence.
Granted, the conflict won’t last forever. Indeed, I suspect one reason defense stocks are already losing steam is that Wall Street analysts are telling their clients the war will be short-lived, peace is around the corner, and things will get back to normal quite soon.
I happen to agree with that assessment. But here’s the thing: The total cost so far for munitions expended that need to be replaced and wear and tear on airframes and ship hulls that will require repair and maintenance is going to drive revenue higher for military hardware stocks, probably inflating profits for years down the road. Savvy investors might want to start buying defense stocks now, while others are still selling, to profit as the U.S. military rebuilds capacity so recently expended in the Mideast.
Here are three large defense stocks I think look most promising for that.
Today’s Change
(1.48%) $1.34
Current Price
$91.61
Key Data Points
Market Cap
$16B
Day’s Range
$90.81 – $92.94
52wk Range
$63.79 – $101.57
Volume
983K
Avg Vol
1.7M
Gross Margin
18.21%
Dividend Yield
0.09%
1. Textron
I’m on record saying defense stocks in general are expensive — and I still think this. Historically, a “cheap” price for a defense stock has averaged about 1 times annual sales, although that number has been inching higher in recent years.
One defense stock still trading within a whisker of that magic 1x sales number, however, is Textron (TXT +1.48%). A manufacturer of everything from armored ground vehicles to golf carts and Arctic Cat snowmobiles, Textron is most famous for its Cessna and Beechcraft aircraft (both also used by the military), its Bell helicopters, and most especially for the V-22 Osprey tiltrotor aircraft that it builds, in cooperation with Boeing (BA +2.06%), for the U.S. Marine Corps.
Granted, snowmobiles and golf carts aren’t playing much of a role in Iran, and we’re seeing more Lockheed Martin F-35s and Boeing F-15s in the air over there than Cessnas. I suspect that Textron’s helicopters and Ospreys, however, will see increasing use as the conflict in the Gulf turns into more of a policing action in the Strait of Hormuz.
At just 1.06 times trailing sales, Textron stock looks close to fairly priced for that prospect. In fact, as of this moment, it’s literally the cheapest defense stock that I cover.
Today’s Change
(-0.83%) $-1.30
Current Price
$155.17
Key Data Points
Market Cap
$20B
Day’s Range
$154.05 – $157.72
52wk Range
$136.91 – $205.77
Volume
1M
Avg Vol
1.1M
Gross Margin
18.04%
Dividend Yield
1.07%
2. Leidos
Slightly more expensive is Leidos (LDOS 0.83%), a tech-focused provider of everything from security products (such as luggage X-rays) to systems for defending against drones and cruise missiles to hypersonic missiles and specialized Intelligence, Surveillance, and Reconnaissance equipment for spy planes. (The company also has a large healthcare unit.)
Perhaps Leidos’s best-known product is the Sea Hunter autonomous warship and its successors, such as Sea Dagger and Sea Archer. Although it’s only one facet of the Leidos story, it’s the one I’m most focused on at present, in the context of the U.S. Navy’s efforts to ramp up shipbuilding and increase the size of its fleet.
From a valuation perspective, Leidos is a bit above my usual price range, trading at 1.17 times sales. Still, the company’s been earning its rich valuation lately, averaging 20% annualized earnings growth over the past five years. At the right price, I’d probably be a buyer.
Huntington Ingalls Industries
Today’s Change
(-0.40%) $-1.60
Current Price
$394.57
Key Data Points
Market Cap
$16B
Day’s Range
$392.94 – $400.55
52wk Range
$211.49 – $460.00
Volume
14K
Avg Vol
516K
Gross Margin
12.70%
Dividend Yield
1.38%
3. Huntington Ingalls
Last but not least — and continuing in the nautical vein — we come to Huntington Ingalls (HII 0.40%), a perennial favorite of mine. Huntington serves as one of America’s two primary military shipbuilders, with a focus on nuclear-powered aircraft carriers and submarines. As such, it’s likely to be a primary beneficiary of America’s ongoing naval buildup.
Priced at 1.26 times sales, it’s the least cheap of the three cheapest defense stocks on my watch list today. On the plus side, though, analysts forecast its long-term earnings growth at 15% per year, the fastest of the three.
Although it’s not at the top of my list, Huntington Ingalls is on the list — and worth a look.
