Rising geopolitical risks make the defense industry a great investment in 2022.
Russia’s shocking invasion of Ukraine this year has reset the global geopolitical scene. Just last year, the United States pulled its troops out of Afghanistan, leading to the idea that the defense industry was in a slump. Now, however, developed countries are rapidly increasing their budgets for military and defense. Germany and Japan are among the countries, besides the U.S., ramping up defense spending. With no end to the Ukraine conflict in sight, and tensions also mounting in other parts of the world, it seems the defense industry will be a busy one for the next few years. And with the stock market in general struggling, the defense industry looks like a safe harbor right now. These eight defense stocks should serve as solid shelters during the current market storm.
Lockheed Martin Corp. (ticker: LMT)
Lockheed Martin is one of the best ways to gain exposure to the defense industry. That’s because it is a large enterprise with irreplaceable programs that span the military ecosystem. Lockheed Martin is also blessed with exceptionally long contracts and project life spans. Its F-35 fighter jet, which accounts for 30% of the company’s revenues, is scheduled to remain in service until 2070, for example. In a world where technology is shortening the life span of many products, Lockheed Martin enjoys a tremendously long horizon in which to keep generating sales and recurring service revenues. At a market capitalization of more than $100 billion, Lockheed Martin is a bellwether name in the industry, and its shares are up 17% year to date through June 23. Even so, the stock sells for just 16 times forward earnings, making it a strong value pick today.
Boeing Co. (BA)
Boeing is primarily a commercial aviation jet maker. And that’s why it has run into trouble in recent years after a number of crashes and investigations into the safety of several models of Boeing jets. However, the company has a sizable military business which has helped stabilize the rest of the company. Boeing’s defense wing primarily focuses on both crewed and unpiloted aircraft along with missiles. There should be significant opportunities for additional sales in the unpiloted aircraft segment along with missiles given the nature of the current conflict in Ukraine. For Boeing to recover, it ultimately needs to get its commercial jet business back on track. However, an upturn in military sales can help right the ship for the time being. Morningstar’s Burkett Huey pegs BA stock’s fair value at $239 per share, suggesting the shares, which closed at $133.97 on June 23, have nearly 80% upside.
AeroVironment Inc. (AVAV)
AeroVironment is perhaps the most correlated defense stock as it pertains to the current conflict in Ukraine. That’s because the company makes the Switchblade system. Switchblade is an advanced direct-fire loitering missile system that in effect serves as a suicide drone. AeroVironment has long been a leader in unmanned aircraft systems and tactical missile systems. However, the war in Ukraine has highlighted the capabilities and utility of these devices like never before. Already, analysts estimate that AeroVironment has generated at least $50 million of additional revenues with sales to Ukraine, and that number could climb in coming months. AeroVironment generated $395 million of total revenues in fiscal 2021, so this is a sizable addition. The company continues to gain momentum in other areas as well, such as a new contract with the Marines for its Puma 3 battlefield drones.
BWX Technologies Inc. (BWXT)
BWX Technologies is a leading player in the nuclear industry across all its facets. BWX is involved in nuclear fuels, nuclear propulsion, radioisotope power systems and nuclear medicine, among others. As it pertains to defense, BWX is an integral supplier of small nuclear reactors and fuel for the U.S. Navy. It has also won contracts for mobile reactors and propulsion work in space-based vehicles. The war in Ukraine and rising tensions in Asia highlight the need for a robust modernized navy that can operate anywhere in the world. Small nuclear reactors are much easier to fuel and supply than many other fossil fuel-based alternatives. In addition, there is likely to be a large role for nuclear power in space exploration. Despite growing signs of what appears to be a nuclear renaissance in 2022, BWX Technologies stock is only up 6.5% this year through June 23. This leaves shares at around 16 times earnings.
Raytheon Technologies Corp. (RTX)
Raytheon, like Lockheed, is a large diversified defense contractor. The company has emerged as an integral player in current efforts to bolster the war effort in Ukraine. That’s due to the company’s shoulder-fired anti-aircraft Stinger missile program. The United States gave a large portion of its existing supply to Ukraine and European allies as a check on Russian air power. In doing so, that depleted the stock that the U.S. had left for its own purposes. To address that shortfall, the U.S. gave a fresh $625 million contract to Raytheon to replenish the military’s supply of these key missiles. While a $625 million contract isn’t a big deal on its own to a company of Raytheon’s size, it shows the sort of opportunities that the company will have going forward as countries replenish and bolster their defense capabilities.
General Dynamics Corp. (GD)
General Dynamics is also a diversified defense contractor operating across a wide variety of segments. It is of particular interest now since it’s a leading provider of goods and services to NATO. In recent years, NATO has ordered hundreds of tactical transport units from General Dynamics along with giving the firm a contract to run its information technology and cloud systems. Under the Trump administration, there were significant questions about the long-term utility of NATO going forward. However, the war in Ukraine has reinforced the importance of NATO as an effective deterrent against invasions of additional countries in Europe. In addition, General Dynamics picked up a $133 million contract for bomb components from the Army in June. Shares remain below 18 times forward earnings and offer a reasonable 2.3% dividend yield.
Textron Inc. (TXT)
Textron is a company focused on both commercial and military helicopters along with business jets. Shares were walloped during the pandemic but have recovered sharply since then. They were recovering, at least, until 2022. Unlike other defense stocks, TXT shares have slumped in recent months and are down 25% year to date. This has pushed shares of Textron to less than 15 times forward earnings. An upcoming catalyst for the company is the Future Attack Reconnaissance Aircraft program. Textron is competing with Lockheed Martin for a lucrative program with the Army, which is expected to name a winner in 2023. Textron also has possibilities for future deals with the Navy and Marines. Meanwhile, Textron shares are off roughly 27% from their 52-week high and now sell for less than 15 times forward earnings.
CAE Inc. (CAE)
The final defense pick gives investors a different way to play the industry. CAE designs, manufactures and distributes simulation equipment and training solutions primarily for the aviation industry, along with a business for training surgeons and health care professionals. The aviation business should see increased demand now as militaries train more pilots and crewmen to increase their readiness in this new geopolitical environment. There should also be an uplift in demand for commercial pilot training, as the industry currently faces a shortfall of crew in general and of younger pilots in particular. As it pertains to the military, CAE is already winning new business. Earlier this year, the German government contracted CAE to provide training for the German Air Force. CAE trades at 28 times forward earnings and should see solid growth as both military and commercial demand improves.
The eight best defense stocks to buy in 2022:
— Lockheed Martin Corp. (LMT)
— Boeing Co. (BA)
— AeroVironment Inc. (AVAV)
— BWX Technologies Inc. (BWXT)
— Raytheon Technologies Corp. (RTX)
— General Dynamics Corp. (GD)
— Textron Inc. (TXT)
— CAE Inc. (CAE)
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Update 06/24/22: This story was published at an earlier date and has been updated with new information.