The defense sector has been experiencing a period of uncertainty. Investors are concerned that U.S. President Donald Trump’s drive for efficiency, wavering support for Ukraine, and push for Europe to take on more of its defense costs could lead to reduced military spending in the U.S. However, Citi analyst Jason Gursky stated in last week’s report that it is “time to buy.”
Gursky argues that current defense stock valuations assume U.S. defense revenue will remain flat “indefinitely,” a scenario he considers unlikely and overly conservative. The analyst anticipates that the passage of the federal government’s 2025 budget, the introduction of a 2026 budget, and contract awards from U.S. and European governments could help alleviate concerns.
In this article, we’ll explore why Gursky sees three leading defense contractors - Lockheed Martin (LMT), Northrop Grumman (NOC), and Boeing (BA) - as primed for a rebound and why investors should consider buying the dip.
Defense Stock #1: Lockheed Martin Corporation
Lockheed Martin (LMT) is one of the largest aerospace and defense companies in the world. The company is recognized for its extensive expertise in researching, designing, developing, manufacturing, integrating, and sustaining advanced technology systems, products, and services. Its market cap currently stands at $112.8 billion.
Shares of the defense contractor have recently been hit particularly hard amid concerns that Trump’s policies could lead to reduced military spending in the U.S. This is understandable, given that 73% of the company’s sales in 2024 came from the U.S. government. The Department of Defense contributed 47% of total sales, while the overall share from the U.S. Government reached 73%. LMT stock is down 3.2% year-to-date.
In a report last week, the Citi analyst cited Trump’s address to Congress as a reason to buy LMT stock. Trump is advocating for a missile defense dome over the U.S., a move that would benefit Lockheed Martin. The firm has a “Buy” rating on LMT stock with a price target of $600.
LMT Stock Slides on Q4 Miss
On Jan. 28, shares of LMT slumped over 9% after the company posted weaker-than-expected Q4 results. Its sales dropped 1.3% year-over-year to $18.62 billion, missing Wall Street’s consensus by $170 million. Sales were affected by having one less week in Q4 2024 compared to Q4 2023, partially offset by the carryover of deferred revenue from the F-35 lot 18 from the third quarter. Also, LMT posted a GAAP EPS of $2.22, down from $7.58 in the same quarter last year, falling short of expectations by $4.38. The sharp decline in profits stemmed from a pre-tax loss of $1.7 billion in Q4, which was associated with classified programs.
When it comes to the positives in the report, the company recorded over $29 billion in orders during Q4, resulting in a book-to-bill ratio of approximately 1.6x. Aeronautics was at the forefront, securing nearly $20 billion in orders, primarily driven by the F-35 Lot 18 and fiscal year 2025 air vehicle sustainment contract awards. So, for every dollar of revenue, there are new bookings worth $1.60, underscoring robust demand for defense solutions and systems. It is also important to highlight the ongoing decline in accrued pension liabilities. This figure dropped 22% year-over-year to $4.79 billion, now representing only 8.6% of total assets.
Meanwhile, the company enhanced its strategic, technical, and operational capabilities by investing over $1.1 billion in independent research and development and capital expenditure projects during the quarter.
Looking ahead, management anticipates positive developments for the business in FY25. The company forecasts full-year sales of $74.25 billion, plus or minus $500 million, driven by the accelerating F-35 program, reflecting a 4.5% year-over-year growth. Also, GAAP EPS is expected to range between $27.00 and $27.30.
LMT Valuation, Dividend, and Analysts’ Estimates
Analysts tracking Lockheed Martin forecast a 4.64% year-over-year drop in its GAAP EPS to $27.15 for fiscal 2025, while revenue is estimated to grow 4.7% from the previous year to $74.38 billion.
Meanwhile, the company returned $6.8 billion of cash to shareholders through dividends and share repurchases in 2024. Shares of LMT currently yield a dividend of 2.8%, well above the sector median of 1.54%. The most recent dividend increase was 4.8% in October 2024. Notably, it has raised its dividend for 22 consecutive years, far exceeding the sector median of 2.1 years. With a payout ratio of 45.55%, there is potential for further dividend increases in the future.
From a valuation perspective, I believe LMT offers value at current levels. The stock trades at a forward P/E ratio (Non-GAAP) of 17.4x, reflecting a slight discount compared to the sector median of 18.34x.
What Do Analysts Expect for LMT Stock?
Analysts have a consensus rating of “Moderate Buy” on Lockheed Martin stock, with a mean target price of $546.23, which indicates upside potential of 15.7%. Out of the 22 analysts offering recommendations for the stock, 11 rate it as a “Strong Buy,” one advises a “Moderate Buy,” nine give a “Hold” rating, and one considers it a “Strong Sell.”
Defense Stock #2: Northrop Grumman
With a market cap of $71.7 billion, Northrop Grumman Corporation (NOC) is a prominent aerospace and defense company that provides advanced technologies and systems to the U.S. government and allied nations. NOC specializes in developing innovative solutions in autonomous systems, advanced weapons, cybersecurity, and space systems.
Northrop Grumman derives the bulk of its revenue from defense contracts, with a substantial portion of its sales sourced from the U.S. Department of Defense. Therefore, it’s not surprising that NOC has shown muted performance this year, with the stock up just 4.8% YTD.
According to Citi, Northrop, similar to LMT, is poised to benefit from Trump’s initiative to develop a missile defense dome over the U.S. The firm maintains a “Buy” rating on NOC stock with a price target of $591.
How Did Northrop Grumman Perform in Q4?
Northrop Grumman reported its financial results for the fourth quarter of fiscal 2024 on Jan. 30. Its revenues remained roughly flat at $10.7 billion in Q4, falling short of Wall Street projections by $270 million. Sales were similar to the prior-year period, with revenue growth in Aeronautics Systems, Defense Systems, and Mission Systems offset by a $231 million decline in Space Systems, primarily due to the wind-down of work on restricted space and NGI programs. Notably, the company swung to a profit of $1.26 billion, or $8.66 per share (GAAP), a turnaround from a loss of $535 million in the same quarter last year, when it incurred a $1.2 billion charge related to the new B-21 Raider bomber project for the U.S. Air Force. NOC’s bottom line surpassed expectations by $2.29.
Meanwhile, Northrop continues to experience strong and sustained demand for its capabilities in both domestic and international markets. Reflecting this demand, it secured $17.3 billion in new awards during Q4. As a result, NOC ended the year with a backlog of about $91.5 billion and a book-to-bill ratio of 1.23 times, laying a strong foundation for future growth.
Looking ahead, management’s full-year guidance indicates expectations for solid sales across a diverse portfolio of business segments. For FY25, the company projects sales to range between $42 billion and $42.5 billion, up from $41.03 billion in FY24. Also, the company guided for an adjusted EPS of $27.85 to $28.25, compared to $26.08 in FY24.
NOC Valuation, Dividend, and Analysts’ Estimates
According to Wall Street estimates, NOC is expected to post a 7.68% year-over-year adjusted EPS growth to $28.08 in FY25. Moreover, analysts project a 3.16% year-over-year increase in the company’s sales to $42.33 billion.
Northrop Grumman has consistently returned value to its shareholders. In 2024, the company returned $3.7 billion of cash through share repurchases and dividends. Its annualized dividend of $8.24 results in a forward yield of 1.68%, slightly above the sector median. Notably, the company has demonstrated strong dividend growth, increasing its dividend for 21 consecutive years. Its three-year, five-year, and ten-year dividend CAGRs are all well above the sector median.
In terms of valuation, priced at 17.32 times forward adjusted earnings, the stock trades at a moderate discount compared to the sector’s median of 18.37x and its five-year average of 17.43x.
What Do Analysts Expect for NOC Stock?
Overall, analysts have deemed Northrop Grumman stock a “Moderate Buy,” with a mean target price of $547.76, indicating upside potential of 11%. Out of the 20 analysts covering the stock, 10 recommend a “Strong Buy,” one advises a “Moderate Buy,” eight suggest a “Hold,” and the remaining one gives a “Strong Sell” rating.
Defense Stock #3: Boeing
Valued at a market capitalization of $111.1 billion, Boeing (BA) is a premier aerospace firm engaged in the design, development, manufacturing, and support of a wide range of aircraft and defense systems. The company is structured into three main segments: Commercial Airplanes, Defense, Space & Security, and Global Services. Notably, the defense segment focuses on developing military aircraft, missile systems, and space exploration technologies.
Shares of the aviation giant have dropped 12.6% on a YTD basis.
Citi’s Gursky pointed out that while Boeing is a large defense contractor, the company’s stock performance is largely driven by the outlook of its commercial aerospace business. Meanwhile, in early February, Citi lifted its price target on Boeing to $210 from $207, while reiterating a “Buy” rating. The firm highlighted that Boeing’s 737 MAX and 787 production is advancing, with negative margins anticipated to unwind by 2026. The firm also mentioned that it expects the defense segment’s margins to stabilize at high single digits.
How Did Boeing Perform in Q4?
Boeing reported its fourth-quarter earnings results on Jan. 28. The company’s revenues plunged 31% year-over-year to $15.24 billion. Although the top-line figure exceeded estimates by $60 million, it holds little significance given the primary focus on a substantial decline in revenues. The strike in the fourth quarter disrupted Boeing’s aircraft production, naturally contributing to the company’s sales decline compared to the previous year. Workers at facilities in Washington, Oregon, and California halted work for nearly two months until a new contract was reached in early November. Obviously, this has also affected the company’s bottom line. The core loss per share stood at $5.90, missing expectations by $2.67.
Meanwhile, the defense segment also took a hit, with revenue falling 20% year-over-year to $5.4 billion on volume and program charges. More precisely, the company faced pre-tax charges of $1.7 billion related to the KC-46A, T-7A, Commercial Crew, VC-25B, and MQ-25 programs. On the positive side, the segment secured $8 billion in orders during the quarter, including contracts for 15 KC-46A Tankers from the U.S. Air Force and seven P-8A aircraft from the U.S. Navy, bringing the backlog to $64 billion.
Management highlighted that demand for the company’s defense products remains robust, driven by the security threats facing the U.S. and its allies. They anticipate the business returning to historical performance levels as the company stabilizes production, advances development programs, and transitions to new contracts with tighter underwriting standards.
BA Valuation and Analysts’ Estimates
Analysts tracking the company project its non-GAAP net loss to narrow by 92.69% year-over-year to $1.49 per share for FY25. They also expect the company’s revenue to grow 27.83% year-over-year to $85.03 billion.
In terms of valuation, the company’s forward EV/Sales ratio stands at 1.71x, which is slightly below the sector median of 1.84x and its five-year average of 2.08x.
What Do Analysts Expect for BA Stock?
Boeing stock has a consensus “Moderate Buy” rating. Among the 25 analysts covering the stock, 16 recommend a “Strong Buy,” one rates it as a “Moderate Buy,” seven suggest holding, and one gives a “Strong Sell” rating. The mean price target for BA stock is $201.43, which is 30.7% higher than current prices. .
