Analysts recommend these picks in the defense sector.
The paradigm for investing in defense stocks changed in a dramatic way when Russia invaded Ukraine, according to Bank of America analyst Ronald Epstein. Epstein estimates that U.S. defense spending as a percentage of gross domestic product could rise from around 2.8% to between 3.5% and 4% in response to the recent Russian aggression, and says there is likely upside to both U.S. and European defense budgets. Epstein is projecting at least $800 billion in U.S. defense spending in 2023, creating big opportunities for defense companies. Here are eight of the best defense stocks to buy now, according to Bank of America.
Raytheon Technologies Corp. (ticker: RTX)
Raytheon Technologies is the defense behemoth created by the 2020 merger of Raytheon and United Technologies. Epstein says Raytheon is his top aerospace and defense stock in 2022. In addition to tail winds from the Russia-Ukraine conflict, Epstein says Raytheon is exposed to the broad recovery in the commercial aerospace market and rising deliveries of narrow-body and GTF engines. He says Raytheon should benefit from additional merger synergies and its diversified exposure to Department of Defense investment priorities, including hypersonics, cybersecurity and missile defense. Bank of America has a “buy” rating and $115 price target for RTX stock, which closed at $98.19 on March 7.
General Dynamics Corp. (GD)
General Dynamics produces a range of vehicles and systems for the U.S. military. In February, the U.S. State Department approved the sale of 250 M1A2 SEPv3 main battle tanks, or MBTs, to Poland for $6 billion. Epstein says the Czech Republic, Romania and other Eastern European countries may also look to boost their tank defenses. General Dynamics’ Marine unit and Gulfstream business provide organic revenue growth in the near-term, and Epstein says its strong balance sheet will drive dividend and buyback growth in the longer-term. Bank of America has a “buy” rating and $280 price target for GD stock, which closed at $247.29 on March 7.
Northrop Grumman Corp. (NOC)
Northrop Grumman is one of the world’s largest weapons and military technology producers. Epstein says Northrop investors looking for growth may need to be patient in the near term thanks to headwinds from the company’s declining legacy programs. However, he says Northrop has one of the best defense portfolios on the market, and its long-term outlook is solid. Epstein says the most profitable phase of the B-21 Raider program is still 10 years away, and the company’s Ground Based Strategic Deterrent, or GBSD, weapons system will begin production by the end of the decade. Bank of America has a “buy” rating and $540 price target for NOC stock, which closed at $477.95 on March 7.
BWX Technologies Inc. (BWXT)
BWX Technologies supplies U.S. submarines and carriers with nuclear reactors, fuel and associated services. BWX’s order backlog finished 2021 at $5.2 billion. Management recently announced a reorganization of its business to separate BWX’s government and commercial businesses into two different reporting segments, a move management hopes will help produce strategic advantages and cost synergies. Epstein says BWT is a nearly pure-play investment in the U.S. Department of Defense’s Indo-Pacific strategy, an initiative that has rare bipartisan support among members of Congress. Bank of America has a “buy” rating and $55 price target for BWXT stock, which closed at $55.73 on March 7.
L3Harris Technologies Inc. (LHX)
L3Harris Technologies is an aerospace and defense company focused on technology-driven mission solutions. Epstein says supply chain disruptions have weighed on L3Harris revenues in recent quarters, but future growth in the F-35 fighter jet program and international demand will boost growth in 2023 and beyond. L3Harris management anticipates the company’s current inventory buildup will be drawn down starting in the second half of 2022. Epstein projects an 11.1% revenue decline in 2022 but is forecasting earnings per share growth of 5.4% this year. Bank of America has a “buy” rating and $285 price target for LHX stock, which closed at $270.74 on March 7.
CACI International Inc. (CACI)
CACI provides software services for the U.S. government. Analyst Mariana Perez Mora says CACI is one of the primary beneficiaries of U.S. government spending on cybersecurity, efforts that may get more attention after reports of multiple cyberattacks on Ukraine. In the fourth quarter alone, CACI won $2 billion in contracts, including $600 million in classified government work. In addition, Mora says CACI has a healthy balance sheet that includes $1.1 billion in cash that can be used for buybacks or strategic acquisitions. Bank of America has a “buy” rating and $310 price target for CACI stock, which closed at $302.24 on March 7.
Leidos Holdings Inc. (LDOS)
Leidos provides technology services and solutions to the defense and intelligence industries and is another company exposed to U.S. government cybersecurity spending. Mora says Leidos management seems committed to its shareholder-friendly capital deployment plan, effectively balancing responsible leverage, share buybacks and organic and inorganic growth investments. Mora is projecting at least $500 million in buybacks in 2022. Leidos recently secured a new $11.5 billion Defense Information Systems Agency, or DISA, contract to consolidate information technology systems as part of the Fourth Estate Network Optimization project. Bank of America has a “buy” rating and $110 price target for LDOS, which closed at $106.86 on March 7.
ManTech International Corp. (MANT)
ManTech provides technology services and solutions to the U.S. defense industry, intelligence community and federal civilian agencies. Mora says ManTech should benefit from increased focus on cybersecurity and high-tech solutions by both the U.S. Department of Defense and the intelligence community. In the fourth quarter, ManTech secured $601 million in contract awards. Its current backlog stands at $10.6 billion, up from $10.2 billion a year ago. Fourth-quarter operating profit margin was 6.7%, exceeding Mora’s estimate of just 5.7%. Bank of America has a “buy” rating and $90 price target for MANT stock, which closed at $87.20 on March 7.
Eight best defense stocks to buy for 2022:
— Raytheon Technologies Corp. (RTX)
— General Dynamics Corp. (GD)
— Northrop Grumman Corp. (NOC)
— BWX Technologies Inc. (BWXT)
— L3Harris Technologies Inc. (LHX)
— CACI International Inc. (CACI)
— Leidos Holdings Inc. (LDOS)
— ManTech International Corp. (MANT)
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Update 03/08/22: This story was published at an earlier date and has been updated with new information.