The best defense stocks have long-term programs as well as footholds in key emerging priorities for the Pentagon and U.S. allies around the world. As of February 2020, here are the best defense stocks with large market caps and high volumes, based on IBD's ratings system:
Boeing (BA) is known for its commercial jets, but its defense and space programs accounted for $5.96 billion in Q4. In 2019, defense revenue accounted for $26.2 billion, down 1% from its 2018 total. The aerospace giant has a market cap of nearly $180 billion.
Boeing has legacy fleets of fighter aircraft like the F/A-18 and F-15, which remain in production and have updates in the works.Boeing is also building the T-7 Red Hawk trainer jet for the Air Force, the MQ-25 Stingray aerial-refueling drone for the Navy, and the KC-46 refueling tanker for the Air Force. Its P-8 Poseidon maritime surveillance aircraft for the U.S. Navy has also proved popular among allied navies too.Meanwhile, the company is investing heavily in space and is building the Crew Space Transportation-100 Starliner to ferry astronauts to the International Space Station as well as the massive Space Launch System, which will be the most powerful rocket ever.But despite strong defense sales, Boeing stock has an IBD Composite Rating of 19 and an EPS Rating of 28 as troubles continue with its 737 Max commercial passenger jet.Analysts downgraded Boeing stock after the Dow Jones aerospace giant announced in December it would pause production of the 737 Max in January as the plane reminds grounded following two deadly crashes.
Northrop Grumman's (NOC) revenue was $8.72 billion in Q4 and $33.8 billion in 2019. Its market cap is $64 billion.The stock has a strong Composite Rating of 90 and an EPS grade of 94. Northrop stock broke out of a 377.44 flat-base entry in September. It then formed a cup with handle base and 382.36 buy point which it just barely bounced into in late January before retreating after Q4 earnings came out.
The defense company is a major subcontractor on Lockheed's F-35 and produces drones such as the Global Hawk, while its purchase of Orbital ATK boosted its space offerings.Another big moneymaker will be the B-21 stealth bomber. The Air Force plans to buy 80 to 100 planes to replace Cold War-era Boeing B-52s.The Pentagon hasn't disclosed a comprehensive cost estimate, saying U.S. adversaries would be able to infer the B-21's capabilities. But so far, the Air Force has put development costs at $23.5 billion, and analysts estimate the total acquisition price tag could hit $80 billion.Air Force Vice Chief of Staff Gen. Stephen Wilson said in July that Northrop is moving on the B-21 development "pretty fast" and implied that the first flight would take place in December 2021.But Randall Walden, director of the Air Force Rapid Capabilities Office, said in October, that he would "not bet on that date" as key hurdles remain. Still, he said Northrop Grumman is building its first test B-21 bomber and has more on the way as it stands up production operations in Palmdale, Calif.
While Boeing is a bigger overall company, Lockheed Martin (LMT) is the bigger defense contractor. Lockheed's revenue was $15.9 billion in Q4 and $59.8 billion in 2019. The company has a market cap of $122 billion.Lockheed stock carries a Composite Rating of 97 and an EPS score of 91. Shares broke out of a handle with a 396.05 buy point in early January but are now extended beyond the chase zone, which maxes out at 415.85, according to MarketSmith analysis.
The F-35 Joint Strike Fighter will be a key moneymaker for Lockheed for years to come. Its acquisition price tag is $400 billion, making it the most expensive Pentagon program ever. The stealth fighter is also seen as the "quarterback" in the Pentagon's emerging warfighting strategy to counter near-peer rivals like Russia and China.The U.S. and its allies have 3,100 F-35s on order through 2035, making Lockheed one of the best defense stocks for steady, long-term revenue. Currently, the fifth-generation jet accounts for 25% of Lockheed's total revenue. Management expects the program's revenue will grow at a faster rate than the overall top line through the end of the decade.Lockheed also produces Sikorsky military and civilian helicopters, as well as a variety of missiles and fire control systems. Its Terminal High Altitude Area Defense missile-defense system has seen a surge in foreign orders.Meanwhile, Lockheed has key hypersonic weapons contracts, and the company expects its missiles and fire control unit to be its fastest-growing business for the next four years, even outstripping the main aeronautics unit.In space, Lockheed has secured major satellite deals and is developing the deep-space Orion spacecraft for NASA. Its joint venture with Boeing, United Launch Alliance, provides launch services for the Pentagon.
Raytheon's (RTN) revenue was $7.84 billion in Q4 and $29.2 billion in 2019. The company's market cap is $62.8 billion.But the company is poised to become the second-biggest aerospace and defense contractor after Boeing in terms of revenue following its June 9 merger announcement with F-35 engine maker United Technologies (UTX).
Pending regulatory approval, the new company will be called Raytheon Technologies and will have annual revenue of about $77 billion. The all-stock deal, worth about $100 billion, is expected to close in early Q2.Raytheon stock has a Composite Rating of 92 and an EPS score of 82. It formed a follow-on flat base with a 220.13 entry point and broke out of that in December and is still in buy range.
Missile-defense systems are in high demand, making Raytheon one of the best defense stocks as threats from China, Russia, North Korea and Iran become larger priorities for the U.S. and its allies.Raytheon builds the Patriot missile defense system along with the interceptors for the Aegis air defense system.The company also builds an array of missiles and munitions, perhaps most notably the Tomahawk cruise missile. Raytheon is a leader in radar systems and electronic warfare. It is also ramping up its cyberdefense capabilities.Raytheon is developing hypersonic technology as well and has predicted that its merger with United Technologies will advance those efforts using innovations from jet-engine maker Pratt & Whitney.
General Dynamics' (GD) revenue was $10.8 billion in Q4 and $39.3 billion in 2019. Its market cap is $52 billion.General Dynamics stock has a Composite Rating of 82 and EPS Rating of 82. The stock broke out of a cup base with a 190.26 entry point in August. But the base was flawed, with light volume, and fell into sell range. Now the stock is forming a flat base with a 193.86 entry point.
The company is a top shipbuilder for the Navy. It's part of a team that's building Littoral Combat Ships, and its Electric Boat unit makes the Virginia-class and Columbia-class submarines.GD's Bath Iron Works also builds Arleigh Burke-class destroyers and Zumwalt-class next-generation destroyers. The NASSCO unit also builds auxiliary and support ships for the Navy, plus oil tankers and dry cargo carriers for commercial operators.General Dynamics is a top provider of land weapons systems too, building Abrams tanks, the Stryker family of vehicles, and Light Armored Vehicles.The company's Gulfstream business jets lead the aerospace segment, which includes a business aviation services division.
Credit: WSJ.com, Business Insider, DOD
© De Angelis & Associates 2020