With rising global tensions and geopolitical conflicts, the defense industry is gaining significant traction, driving robust demand for defense products within the U.S. economy. Given this favorable environment, investors could scoop up shares of fundamentally sound defense companies like General Dynamics Corporation (GD), Northrop Grumman Corporation (NOC), and Textron Inc. (TXT).
Recent surveys reveal that 83% of respondents view geopolitical tensions as the biggest threat to global economic growth, surpassing concerns about high inflation and monetary tightening. Over the next decade, 86% see rising geopolitical fragmentation and protectionism as major long-term threats. Current issues like the Ukraine conflict, Middle East instability, and US-China tensions, coupled with the uncertainty of upcoming elections, amplify this focus on geopolitical risks.
In response to these uncertainties, governments worldwide are increasing their defense budgets to strengthen their military capabilities. For instance, the U.S. Department of Defense (DOD) has allocated a substantial $2.10 trillion budget for 2024, with $1.08 trillion earmarked for defense-related expenses.
As global tensions, such as the Russia-Ukraine conflict and potential issues in the Taiwan Strait, continue to escalate, the defense market is expected to experience significant growth. The global defense market is projected to reach $772.49 billion by 2028, exhibiting a CAGR of 5.8%.
Given these developments, defense companies will likely see increased demand for their products and services, making defense stocks attractive for investors seeking opportunities amid geopolitical instability.
Considering these factors, let’s evaluate the fundamental aspects of the three Air/Defense Services picks, beginning with the third choice.
Stock #3: Northrop Grumman Corporation (NOC)
NOC is an international aerospace and defense technology company. The company operates through four segments: Aeronautics Systems; Defense Systems; Mission Systems; and Space Systems.
On August 21, the company declared a quarterly dividend of $2.06 per share, payable to its shareholders on September 18, 2024. With 20 years of consecutive dividend growth, NOC pays an annual dividend of $8.24, which translates to a yield of 1.57% at the current share price. Its four-year average dividend yield is 1.58%. Moreover, its dividend payouts have increased at a CAGR of 9.3% over the past five years.
For the second quarter of 2024, which ended on June 30, NOC’s total sales increased 6.7% year-over-year to $10.22 billion. Its total operating income rose 12.7% from the year-ago value to $1.09 billion. The company’s net earnings amounted to $940 million and $6.36 per share, representing an increase of 15.8% and 19.1%, respectively, from the same period last year. Also, its free cash flow for the quarter increased 79.7% year-over-year to $1.11 billion.
As per the updated guidance for the fiscal year 2024, NOC forecasts sales between $41 billion to $41.40 billion. It expects adjusted EPS between $24.90 and $25.30. The company also expects free cash flow to be in the range of $2.25 billion to $2.65 billion.
Street expects NOC’s revenue and EPS for the fiscal year ending December 2024 to increase 5.2% and 8.2% year-over-year to $41.34 billion and $25.20, respectively.
Shares of NOC have gained 16.3% over the past three months and 20% over the past year to close the last trading session at $522.69.
NOC’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
NOC has a B grade for Momentum and Stability. It is ranked #17 out of 70 stocks in the Air/Defense Services industry. Click here to see the additional ratings for NOC (Growth, Value, Sentiment, and Quality).
Stock #2: General Dynamics Corporation (GD)
GD operates as an aerospace and defense company worldwide. It offers a portfolio of products and services in business aviation, ship construction and repair, land combat vehicles, weapons systems and munitions, and technology products and services. The company operates through four segments: Aerospace; Marine Systems; Combat Systems; and Technologies.
On August 7, the company declared a quarterly dividend of $1.42 per share of common stock, payable to its shareholders on November 15, to the shareholders of record on October 11, 2024.
GD pays an annual dividend of $5.68, which translates to a yield of 1.93% at the current share price. Its four-year average dividend yield is 2.27%. Moreover, the company’s dividend payouts have increased at a CAGR of 7% over the past five years.
In the same month, GD’s business unit, General Dynamics Electric Boat, secured a $1.3 billion undefinitized contract modification from the U.S. Department of Defense. This contract allows Electric Boat to purchase long lead time materials for Virginia Class Block VI submarines. The modification will enable suppliers to invest in the necessary capacity and materials to boost production.
During the second quarter that ended on June 30, 2024, GD’s revenue increased 18% year-over-year to $11.98 billion. The company’s operating earnings came in at $1.16 billion, reflecting an increase of 20.2% from the prior year. In addition, its net earnings came in at $905 million, up 21.6% year-over-year, while its earnings per share grew 20.7% from the year-ago value to $3.26. GD’s free cash flow increased 18.1% year-over-year to $613 million.
The consensus revenue estimate of $12.17 billion for the fiscal third quarter (ending September 2024) represents a 15.1% increase year-over-year. The consensus EPS estimate of $3.73 for the same quarter indicates a 22.6% improvement year-over-year. The company has an impressive revenue surprise history; it surpassed the consensus revenue estimates in each of the trailing four quarters.
Over the past year, the stock has surged 30.2%, closing the last trading session at $294.92.
GD’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It also has a B grade for Growth, Momentum, Stability, and Sentiment. Out of 70 stocks in the Air/Defense Services industry, GD is ranked #6. Click here to see GD’s rating for Value and Quality.
Stock #1: Textron Inc. (TXT)
TXT is a multi-industry company that leverages its global network of aircraft, defense, industrial, and finance businesses to provide customers with various solutions and services. It operates through six segments: Textron Aviation; Bell; Textron Systems; Industrial; Textron eAviation; and Finance.
On August 21, Bell Textron Inc. (a TXT company) delivered a Bell 429 and a signed purchase agreement for two Bell 407GXi aircraft with the Chicago Police Department. Bell’s advanced technology and multi-mission capabilities make these models ideal for public safety agencies. This continued partnership, lasting over 20 years, underscores Bell’s leadership in the sector and highlights TXT’s sustained influence and growth in the public safety aviation market.
On May 20, TXT’s Textron Systems Corporation collaborated with Kodiak Robotics, Inc. to develop an autonomous military ground vehicle for advanced terrain and driverless operations. This collaboration aims to enhance national security by deploying unscrewed vehicles for high-risk tasks, reducing risks to military personnel, and bolstering TXT’s role in defense automation.
For the six months ended June 29, 2024, TXT’s total revenues increased 3.3% year-over-year to $6.66 billion, while its segment profit improved by 3.6% from the year-ago value to $633 million. The company’s adjusted income from continuing operations amounted to $529 million or $2.74 per share, representing an increase of 2.9% and 9.2% from the same period last year, respectively.
According to the outlook for 2024, TXT forecasts adjusted income from continuing operations to range from $1.18 billion to $1.22 billion. The company also expects non-GAAP EPS to be between $6.20 and $6.40 and the manufacturing cash flow before pension contributions (non-GAAP) to range between $900 million and $1 billion.
Analysts expect TXT’s revenues for the third quarter (ending September 2024) to increase 8.4% year-over-year to $3.62 billion, while its EPS for the same period is expected to grow 6.4% from the prior year to $1.58. Moreover, the company has surpassed the consensus EPS estimates in three of the trailing four quarters, which is promising.
The stock has gained 14.2% over the past nine months to close the last trading session at $88.94.
TXT’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
It also has an A grade for Value and a B for Momentum and Quality. It is ranked #5 out of 70 stocks within the same industry. Click here to see TXT’s ratings for Growth, Stability, and Sentiment.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
GD shares were trading at $294.23 per share on Wednesday afternoon, down $0.69 (-0.23%). Year-to-date, GD has gained 15.04%, versus a 16.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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