U.S. defense spending totaled $889 billion in 2010, or more than 20 percent of the government's total expenditures.
While there is talk in Congress of reining in the Pentagon, it’s unlikely to be subject to severe cutbacks, given U.S. military activity in Iraq, Afghanistan, and Libya — and the armed forces’ substantial political clout.
Companies like General Dynamics (GD) and Raytheon (RTN) should continue to thrive, making their stocks strong potential investments.
The company produces some of the military’s most important weapons, including the army’s principal tank — the M1 Abrams — and Virginia-class nuclear submarines. For the private sector, it makes Gulfstream jets.
General Dynamics reported profit of $729 million in the first quarter, up 19 percent from $614 million a year earlier, topping expectations. Sales rose 9 percent to $8.6 billion.
The company’s solid business lines should propel it to continued profit growth going forward, analysts say. General Dynamics forecast net earnings of between $7 and $7.10 per share this year, up from $6.81 in 2010.
There is talk in the investment community that Warren Buffett may be interested in purchasing the company. Analysts at Jefferies have a buy rating on the stock, with a target price of $92, up from the April 21 close of $72.25.
Raytheon, the world’s largest missile maker, saw its sales rise 1 percent last year to $25.2 billion, while its book value climbed 4 percent to $25.87 per share from $24.83 in 2009.
The company expects things to continue rolling along this year, with profit from continuing operations increasing to between $4.83 and $4.98 a share from $4.79 in 2010, and sales gaining to between $25.5 billion and $26.3 billion.
The company’s technological innovations, such as security measures to protect its missile systems, help make its products essential for the military. Cost-cutting and growing sales overseas are boosting Raytheon’s earnings too.
Shortly after the most recent earnings report, both Oppenheimer and RBC Capital analysts raised their target for Raytheon’s stock price — to $56 in Oppenheimer’s case and $57 for RBC. Raytheon shares closed April 21 at $48.75.
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