The paradigm for investing in defense stocks changed in a dramatic way when Russia invaded Ukraine in February 2022. U.S. President Joe Biden's recently proposed fiscal 2024 Department of Defense budget calls for $842 billion in discretionary DoD spending, up 3.2% from 2023 levels. Bank of America analyst Ronald Epstein expects DoD discretionary spending will surpass the $1 trillion mark by fiscal 2026, creating big opportunities for defense companies.
Defense stocks are attractive investments during periods of economic uncertainty because they often have predictable, long-term contracts.
Here are eight defense stocks to buy with big upside potential, according to Bank of America:
Raytheon Technologies Corp. (RTX)
Raytheon Technologies is the defense behemoth created by the 2020 merger of Raytheon and United Technologies. Epstein says Raytheon will benefit from DoD spending in several areas, including next-generation aircraft, missiles and munitions, and cybersecurity. Raytheon recently announced a restructuring that will combine Raytheon Intelligence & Space with Raytheon Missiles & Defense to form "Raytheon." Pratt & Whitney and Collins Aerospace will remain their own segments. Epstein says Raytheon will benefit from the Patriot missile system and other high-margin legacy systems and a recovery in the commercial aerospace market. Bank of America has a "buy" rating and $120 price target for RTX stock, which closed at $98.01 on March 21.
Northrop Grumman Corp. (NOC)
Northrop Grumman is one of the world's largest weapons and military technology producers. Epstein says Northrop is a key DoD contractor in next-generation aircraft and space defense. Epstein says investors shouldn't be concerned about Northrop's weaker fourth-quarter margins and soft initial 2023 free cash flow guidance. He says the margin pressures are largely attributable to the wind-down of high-margin legacy programs like Global Hawk, E-2 and JSTARS. Epstein says Northrop's terminal growth rate could exceed the historical growth rate of U.S. defense spending. Bank of America has a "buy" rating and $655 price target for NOC stock, which closed at $449.98 on March 21.
General Dynamics Corp. (GD)
General Dynamics produces a range of vehicles and systems for the U.S. military. In February, Epstein raised his forecast for 2024 Gulfstream deliveries to 170 aircraft, including 138 large aircraft and 32 midsize planes. He projects 4.9% revenue growth in 2023, including first-quarter Marine segment sales of $2.5 billion and Technology segment sales of $3.1 billion. Epstein is bullish on General Dynamics' exposure to defense spending related to land and sea priorities, as well as the commercial aerospace market recovery. Bank of America has a "buy" rating and $305 price target for GD stock, which closed at $222.37 on March 21.
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. Analyst Mariana Perez Mora says Leidos is well positioned for long-term growth across all of its major end markets. The company's Cobham Aviation Services Australian Special Missions business will be a key growth driver in its Defense Solutions segment. Cobham Aviation generated more than $40 million in sales in the final two months of 2022 alone. Mora projects 3.7% sales growth in 2023. Bank of America has a "buy" rating and $125 price target for LDOS stock, which closed at $92.64 on March 21.
KBR Inc. (KBR)
KBR provides science, engineering and technology solutions for government and commercial customers. The company is particularly well positioned to capitalize on DoD space and cybersecurity spending. Mora says KBR's Sustainable Technology Solutions is on track to reach $300 million in earnings before interest, taxes, depreciation and amortization, or EBITDA, in 2023, two years ahead of schedule. She says KBR is an excellent defense play for investors prioritizing environmental, social and governance, or ESG, standards. Roughly 40% of KBR's earnings come from sustainable technologies and environmental solutions, and it has been carbon-neutral since 2019. Bank of America has a "buy" rating and $70 price target for KBR stock, which closed at $52.56 on March 21.
CACI International Inc. (CACI)
CACI provides software services for the U.S. government and is another great way for investors to gain exposure to DoD space and cybersecurity spending. Mora says CACI's key focus areas are in high demand, including command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR). She says CACI is well positioned to capitalize on a ramp-up in government spending on space software and counter-unmanned aircraft systems (C-UAS). CACI recently upped its buyback authorization by $750 million, and Mora projects 5.9% revenue growth in 2023. Bank of America has a "buy" rating and $365 price target for CACI stock, which closed at $286.71 on March 21.
BWX Technologies Inc. (BWXT)
BWX Technologies supplies U.S. submarines and carriers with nuclear reactors, fuel and associated services. Epstein says microreactor volumes and uranium processing have been key growth drivers for BWX and will likely continue to perform well in 2023. Epstein says BWX's end markets of naval operations, nuclear energy and medicine are relatively recession-proof. He says BWX is a great way for investors to gain exposure to the U.S. Navy as it ramps up operations to counter China. Epstein projects 6.3% revenue growth in 2023. Bank of America has a "buy" rating and $75 price target for BWXT stock, which closed at $62.63 on March 21.
Rocket Lab USA Inc. (RKLB)
Rocket Lab is an aerospace and defense company that specializes in launch services, spacecraft engineering and design, components manufacturing and other spacecraft-management solutions. Epstein says Rocket Lab's roughly $472 million in cash is more than enough to cover the $250 million it will take to develop the company's Neutron rocket, which is designed for human spaceflight and deep space missions. In addition, Rocket Lab completed five commercial and four government launches of its Electron rocket in 2022 without a single failure. Bank of America has a "buy" rating and $13 price target for RKLB stock, which closed at $3.95 on March 21.
* The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on our Site constitutes a solicitation, recommendation, endorsement, or offer by De Angelis & Associates or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content on this site is information of a general nature and does not address the circumstances of any particular individual or entity.
Article initially appeared on money.usnews.com
© De Angelis & Associates 2023. All Rights Reserved.