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Defense Stocks May Have Priced In Cuts

By    |   Tuesday, 14 February 2012 08:09 AM

After 10 years of overseas wars, the major aerospace and defense companies face large cuts in the U.S. defense budget. As these companies battle to maintain growth and profits, however, the market already may have priced a lot of the bad news into share values.

Of the aerospace defense contractors, Lockheed Martin (LMT) is the largest, pure-play company, at a $27 billion market cap. Then comes General Dynamics (GD) at $25 billion, with a larger exposure to the commercial aerospace business.

Northrop Grumman (NOC) is a $15 billion defense contractor which generates a large portion of its revenue through aerospace-related projects and contracts.

A review of the five-year stock charts for these three companies show share values dropping with the 2008-2009 bear market and, to date, not recovering much of the sold off value. General Dynamics and Northrop Grumman are 25 percent below the 2007 peaks and Lockheed Martin is down 28 percent from a 2008 peak.

The three stock charts together show these defense contractors are closely correlated over multi-year periods of time. An investor who believes the sector has value may be best served by buying shares of all three.

Value numbers

Consider these value factors: Lockheed Martin’s current dividend yield is 4.6 percent, with 2012 earnings expected to equal the 2011 results. The dividend was increased by one-third in the 2011 fourth quarter.

General Dynamics yields 2.7 percent and the distribution is usually increased in the first quarter of the year. Earnings for GD are also expected to be flat in 2012.

Wall Street analysts forecast earnings for Northrop Grumman to decline by about 10 percent in 2012. The stock yields 3.4 percent and there is a high probability the payout will increase in May in spite of lower earnings.

The U.S. defense budget is scheduled to be cut by $1 trillion over the next 10 years. However, that trillion comes from a government budget of ever-increasing spending. The aerospace defense companies currently hold large order backlogs, providing revenue and earnings visibility for the next few years.

Growth opportunities for these companies, too, might come from international sales, such as the recent Lockheed Martin F-35 fighter jet purchase by Japan.

All three companies next report on April 26.

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Tuesday, 14 February 2012 08:09 AM
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