Over the past year, defense stocks have benefited from increased outlays on weapons by the United States and its allies due to the Ukraine war. Still, companies have struggled with supply snags, higher costs, and labor shortages.
Nevertheless, Russia’s aggression has created lucrative opportunities for the defense sector, driving the demand for weapons being transferred from the United States to Ukraine. This is expected to boost revenues for the companies within the industry.
The global aerospace and defense market size is expected to expand at a CAGR of 5.9%, reaching $1.05 trillion by 2028. According to Statista, defense outlays are predicted to increase up to $998 billion in 2032.
Moreover, the National Defense Authorization Act has authorized $858 billion in total defense spending and contains several provisions that will interest companies that do business with the U.S. government. In addition, the act includes substantial investments related to aircraft technology, electronic warfare, 5G technology development, and artificial intelligence programs.
Given this backdrop, investors could consider investing in Raytheon Technologies Corporation (RTX), Lockheed Martin Corporation (LMT), and L3Harris Technologies, Inc. (LHX), which are well-positioned to capitalize on the industry’s long-term growth prospects.
Raytheon Technologies Corporation (RTX)
RTX is an aerospace and defense company that provides systems and services for commercial, military, and government customers worldwide. It operates through four segments: Collins Aerospace; Pratt & Whitney; Raytheon Intelligence & Space; and Raytheon Missiles & Defense.
On February 17, the U.S. Air Force Life Cycle Management Center contracted RTX’s Collins Aerospace business to continue producing new, advanced propellers for C-130 aircraft. The $135 million contract would allow Collins to manufacture and support new NP2000 propeller systems and help generate substantial revenues for the company.
In the same month, the company declared a quarterly dividend of $0.55 per share on its common stock, payable to its shareholders on March 23, 2023.
Also, its four-year average dividend yield is 2.39%, and its forward annual dividend of $2.20 translates to a 2.17% yield on the current price level. RTX’s dividends have grown at 5.3% and 4.8% CAGRs over the past three and five years, respectively. In addition, it has a record of 29 consecutive years of dividend growth.
On January 24, the company outlined its plans to strengthen its market position and generate additional revenue and technology synergies by realigning its business units. Christopher Calio, Chief Operating Officer at RTX, said, "By more fully leveraging our scale, we will deliver enhanced customer solutions and unlock cost savings opportunities with improved resource allocation and a streamlined footprint."
RTX’s net sales increased 6.2% year-over-year to $18.09 billion in the fiscal fourth quarter (ended December 2022). Its operating profit grew 13.7% from the year-ago value to $1.50 billion. The company’s adjusted net income came in at $1.87 billion, up 15.7% year-over-year. Also, its non-GAAP EPS increased 17.6% from the year-ago value to $1.27.
The consensus EPS estimate of $1.20 for the second quarter (ending June 30, 2023) represents a 3.6% improvement year-over-year. The consensus revenue estimate of $17.59 billion for the same quarter indicates a 7.8% increase from the prior-year period. The company has an excellent earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
Over the past year, the stock has lost 7.6% to close its last trading day at $101.51.
RTX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth, Stability, and Sentiment. Out of 76 stocks in the Air/Defense Services industry, it is ranked #9. Click here to see the additional POWR Ratings of RTX (Value, Momentum, and Quality).
Lockheed Martin Corporation (LMT)
Security and aerospace company LMT focuses on the research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services. It operates through four segments: Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space.
On February 18, the U.S. Navy awarded LMT a contract worth more than $2 billion to integrate the Conventional Prompt Strike (CPS) weapon system onto ZUMWALT-class guided missile destroyers (DDGs). Through this contract, the company continues to advance hypersonic strike capability onto surface ships for the United States. This reflects the growing demand for LMT's services among its peers.
On January 26, the company declared a first-quarter 2023 dividend of $3.00 per share, payable on March 24, 2023. LMT’s four-year dividend yield is 2.59%, and its current dividend of $12 translates to a 2.52% yield. Its dividend payouts have grown at CAGRs of 8.2% and 8.9% over the past three and five years, respectively. Also, it has a record of 20 years of dividend growth.
In the same month, LMT announced the successful first flight of the F-16 Block 70 aircraft. OJ Sanchez, vice president, Integrated Fighter Group, said, “This milestone demonstrates LMT’s commitment to advancing this program and getting this much-needed aircraft and its advanced 21st Century Security capabilities to the war fighter.”
LMT’s net sales for the fiscal fourth quarter (ended December 31, 2022) increased 7.1% year-over-year to $18.99 billion. The company’s non-GAAP net earnings and non-GAAP EPS for the period amounted to $1.68 billion and $6.32, representing 1.7% and 7.9% year-over-year, respectively. In addition, its total assets increased 3.9% year-over-year to $52.88 billion for the fiscal year that ended December 31, 2022.
Analysts expect LMT’s EPS and revenue to increase 1.1% and 3% year-over-year to $6.39 and $15.91 billion, respectively, in the fiscal second quarter (ending June 30, 2023). It surpassed the EPS estimates in three of the trailing four quarters.
Over the past year, the stock has gained 22.3% to close the last trading session at $475.63.
LMT’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B which equates to a Buy in our proprietary rating system.
It has a B grade for Sentiment and Quality. Within the same industry, it is ranked #7. Click here to see the other ratings of LMT for Growth, Value, Momentum, and Stability.
L3Harris Technologies, Inc. (LHX)
LHX is a global aerospace and defense technology innovator, delivering mission-critical solutions for government and commercial customers. The company provides advanced technologies across space, air, land, sea, and cyber domains.
On February 1, LHX was named one of FORTUNE’s World’s Most Admired Companies for 2023 by earning high marks for innovation, social responsibility, and financial soundness. It ranked seventh among its peers in the global Aerospace and Defense category, maintaining its record since its formation in mid-2019.
On January 1, the company acquired Viasat Inc.’s (VSAT) Tactical Data Links product line, commonly known as Link 16, for approximately $1.96 billion. This acquisition enables LHX to expand its resilient communication and networking capabilities to a larger user base across multiple domains.
During the fourth quarter of the fiscal year 2022, LHX’s revenue from product sales and services increased 5.2% year-over-year to $4.58 billion. Its attributable net income and net income per share for the same period amounted to $416 million and $2.17, respectively.
LHX has a four-year average dividend yield of 1.71%, and its annual dividend of $4.48 yields 2.09% at the current price level. Its dividend payouts have grown at a 16% CAGR over the past three years and 15.3% over the past five years. Also, it has a record of 21 years of dividend growth.
The consensus revenue estimate of $4.28 billion for the first quarter (ending March 31, 2023) represents a 4.2% improvement year-over-year. Moreover, its EPS is expected to increase by 10.2% per annum over the next five years.
Shares of LHX have gained 9.9% over the past month to close the last trading session at $214.02.
LHX’s strong prospects are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
It also has a B grade for Quality. The stock is ranked #21 out of the 76 stocks in the same industry. To see the other ratings of LHX for Growth, Value, Momentum, Stability, and Sentiment, click here.
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RTX shares were trading at $100.88 per share on Tuesday morning, down $0.63 (-0.62%). Year-to-date, RTX has declined -0.04%, versus a 4.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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