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Does anyone even remember “The Sequester”? That Congressional budget deal where everyone was afraid the defense industry would get clobbered? All it did was slow the rate of growth of defense spending. What it did was create uncertainty in defense stocks and if you were smart, you bought them.
Even if you missed that chance, defense stocks are a perpetual bargain. It’s one area where America will always spend money. Even in a political environment that is more dovish than hawkish, military contractors and defense firms donate lots of money to Congress.
These are legacy businesses that are always innovating, as technology requires upgrades to our existing military hardware.
Of course, these companies do a lot more than just military work, and that supplements the entire sector.
So which defense stock do you buy? You really should own at least one in your long term portfolio.
Raytheon (NYSE:RTN) operates in four divisions: Defense Systems; Intelligence, Information, and Services; Missile Systems; and Space and Airborne Systems. So yes, besides the missiles and things that explode, the company also offers intelligence, surveillance and reconnaissance, along with cybersecurity, logistics, mission support, and engineering solutions.
That means they are deep into Secret Squirrel stuff. Raytheon openly announces that it serves the DoD, the U.S. Intelligence Community, our Armed Forces, Homeland Security.
RTN has a long term EPS growth rate pegged at 11%, and pays a 2.6% yield. That makes the 14x estimate that it is trading at very reasonable.
Lockheed Martin (NYSE:LMT) operates in five segments: Aeronautics, Information Systems & Global Solutions, Missiles and Fire Control, Mission Systems and Training, and Space Systems. It isn’t quite as military-heavy, but that’s just fine.
It has great diversification, and trades at 16x estimates, on long term growth estimates of 9.4% and a 3.2% yield. So it’s a bit pricey.
Northrop Grumman (NYSE:NOC) has an Aerospace Systems division that primarily deals with government agencies for use in military and science applications. It has an Electronic Systems segment that is used in everything having to do with aerospace and defense.
Information Systems and Technical Services segment provides logistics, modernization, and sustainment support; and other advanced technology and engineering services, including space, missile defense, nuclear security, training, and simulation.
NOC trades at 13.5x long term estimates, in long term growth of 7.6%, and pays 3.2% in dividends. It’s also expensive for your portfolio.
All three companies have terrific balance sheets. Raytheon is in the best shape with $4.1 billion in cash offset by $4.7 billion in debt. They all throw off great cash flow, of which Raytheon generates about $2 billion.
I think Raytheon is the choice here. With it having the best growth rate, and trading closer to that growth rate, it edges out everyone else.
If you want to go broad instead of having to pick and choose the best company for your needs, that’s why ETFs exist. PowerShares Aerospace and Defense (NYSE:PPA) or iShares Dow Jones Aerospace and Defense (NYSE:ITA). Both are fine choices, as they each hold all the major aerospace and defense firms, just in different volume.
Lawrence Meyers does not own shares in any company mentioned.
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