Elon Musk and his team at the Department of Government Efficiency (DOGE) have swung into action to cut federal spending. Touted as the closest aide to President Donald Trump, Musk has been given license to cut jobs, trim federal agencies, and reduce costs however he sees fit.
This has given way to worries in the defense sector as Trump is actively looking to trim U.S. involvement in various global conflicts. Consequently, shares of the most popular defense ETF, the SPDR S&P Aerospace & Defense ETF (XAR), with $2.8 billion assets under management, has underperformed the S&P 500 Index ($SPX) this year. Does this make defense stocks a no-go area for investors?
Bank of America analyst Mariana Perez Mora does not think so and believes that such worries are “largely overdone.”
Moreover, Mora thinks that the recent selloff in the sector provides investors an opportunity to add to their portfolios. Two names stand out according to the analyst.
Defense Stock #1: Booz Allen Hamilton
Founded in 1914, Booz Allen Hamilton (BAH) offers a wide range of services, including analytics, digital solutions, engineering, and cyber expertise, primarily catering to government agencies, corporations, and non-profit organizations. The company currently commands a market cap of $14.9 billion.
BAH stock is down 12.5% on a YTD basis while offering a dividend yield of 1.96%, which is higher than the sector average of 1.37%. Notably, the company has been raising dividends consistently over the past 14 years and has a payout ratio of 28% which signals room for further growth.
Meanwhile, the results for the most recent quarter came in ahead of consensus estimates on both the revenue and earnings front. In the third quarter of its fiscal 2025, Booz Allen reported revenue of $2.9 billion which marked yearly growth of 13.5%. EPS for the quarter rose to $1.55 from $1.41 in the year-ago period while surpassing the consensus estimate of $1.52.
Further, its total backlog, a key indicator of the company’s order book, rose by 14.8% from the prior year to $39.4 billion.
Net cash from operating activities for the nine months ended Dec. 30, 2024 saw an impressive rise of about 587% from the previous year to $789.9 million. Overall, the company closed the quarter with a cash balance of $453.5 million which was much above its short-term debt of $82.5 million.
Also, Booz Allen raised its revenue guidance for fiscal 2025 to 12%-13% from 11%-13%, denoting sustained demand visibility for its products and services.
Booz Allen Hamilton is strategically poised for continued growth. Additionally, with a strong presence in areas like artificial intelligence (AI), cyber defense, and other emerging technologies, Booz Allen is well-positioned to capture opportunities in these high-growth markets. The company projects that more than a quarter of its future earnings will stem from these lucrative sectors.
Overall, analysts have given BAH stock a consensus “Moderate Buy” rating with a mean target price of $155.18. This denotes upside potential of about 32% from current levels. Out of 12 analysts covering the stock, six have a “Strong Buy” rating, one has a “Moderate Buy” rating, four have a “Hold” rating and one has a “Strong Sell” rating.
Defense Stock #2: Lockheed Martin
Lockheed Martin (LMT) is a global aerospace, defense, weapons, security, and advanced technologies company. It focuses on four main business segments: Aeronautics, Missiles and Fire Control, Rotary and Mission Systems, and Space Systems. The company is also heavily involved in satellite systems, missile defense, cybersecurity, and space exploration, with commercial and government contracts.
Valued at a market cap of $101.9 billion, LMT stock is down 10.6% on a YTD basis. The stock offers a dividend yield of 3.04% which is much higher than the sector average. With 22 years of consecutive dividend growth, the company is on the verge of becoming a “Dividend Aristocrat.”
After reporting an earnings beat for nine straight quarters, Lockheed Martin missed its earnings estimates in Q4 by a wide margin. EPS came in at $2.22 (vs. estimates of $6.60 per share). Net sales also witnessed a modest decline of 1.3% in the same period to $18.62 billion and missed analyst estimates.
The total backlog for the year stood at $176 billion, up 9.6% from the previous year.
Its cash from operations and free cash flow were at $1.02 billion and $441 million compared to $2.4 billion and $1.7 billion in the prior year. Overall, the company exited the quarter with a cash balance of $2.5 billion.
Lockheed Martin’s management has placed emphasis on innovation, which is poised to be a significant driver of the company’s growth over the long term.
One such example is the company’s advancements in artificial intelligence. Recent demonstrations showcasing AI-enabled autonomous drones and ground vehicles highlight Lockheed Martin's ability to apply cutting-edge AI solutions to real-world scenarios.
Analysts remain cautiously optimistic about LMT, attributing to it a rating of “Moderate Buy” with a mean target price of $549.82 which denotes upside potential of about 27% from current levels. Out of 22 analysts covering the stock, 11 have a “Strong Buy” rating, one has a “Moderate Buy” rating, nine have a “Hold” rating and one has a “Strong Sell” rating.
