With the precipitous drop in oil prices, many aerospace and defense investors are worried that the toll being taken by Middle East countries will slow what has been a consistent and important ongoing set of purchases from American companies. The fact is, while the deficits are jumping, the Middle East remains a hotbed of instability, and nations there are expected to continue to be buyers.
In a new research report, the analysts at RBC stay overweight on the sector and maintain that the strong demand for Western defense equipment should stay in place unabated. Middle East spending was a staggering $204 billion last year, which is up 8% since 2013, and the team at RBC expects this trend to continue.
Four large cap blue chip leaders are rated Outperform, with one them the top pick at RBC.
Raytheon
This company has a diversified mix of businesses. It posted solid fourth-quarter numbers, and it is the top pick at RBC as well. Raytheon Corp. (NYSE: RTN) is an industry leader in defense, government electronics, space, information technology and technical services. The company operates in four principal business segments: Integrated Defense Systems, Intelligence, Information and Services, Missile Systems, and Space and Airborne Systems.
The company is not only likely to benefit from domestic defense purchasing, but Raytheon has posted large contract sales to the Saudis over the past two years. Last year, Raytheon purchased privately held cybersecurity company Blackbird Technologies for about $420 million. The acquisition will help expand its surveillance and cybersecurity services to clients. Raytheon provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing; effects; and command, control, communications and intelligence systems, as well as cybersecurity and a broad range of mission support services.
Raytheon investors are paid a solid 2.15% dividend. The RBC price target for the stock is $147, and the Thomson/First Call consensus price target is set at $140.13. The stock closed the day Tuesday at $125.22 per share.
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General Dynamics
This company, like other major defense prime contractors, had a very solid year, and it makes the list at RBC as well. General Dynamics Corp. (NYSE: GD) is a worldwide aerospace and defense company, and it has over 96,000 employees worldwide. The company operates through four business groups: Aerospace, Combat Systems, Marine Systems, and Information Systems and Technology. The U.S. government is its largest customer, which could continue to bode well as Congress is unlikely to change hands.
General Dynamics stock has awarded its investors with returns of about 160% in the past decade, and it posted good fourth-quarter numbers on solid execution across the board. The company pays regular dividends and has a share repurchase plan in place. This is an outstanding stock for long-term growth portfolios.
General Dynamics investors are paid a 2.05% dividend. The RBC price target is a whopping $166, while the consensus target price is set at $159.69. The stock closed most recently at $135.91 a share.
Lockheed Martin
Lockheed Martin Corp. (NYSE: LMT) is another top aerospace and defense stock to buy, as many on Wall Street are expecting a very solid continuation of U.S. and foreign defense spending. Employing 112,000, Lockheed Martin engages in the research, design, development, manufacture, integration and sustainment of technology systems, products and services. The company also provides management, engineering, technical, scientific, logistics and information services. It’s Aeronautics segment offers combat and air mobility aircraft, unmanned air vehicles and related technologies.
The company completed its $9 billion acquisition of Sikorsky last year, and analysts around Wall Street applauded the deal as Lockheed Martin become the world’s largest maker of military helicopters. It also became the maker of the world’s most sophisticated autonomous helicopters, with no clear competition in sight.
Both Lockheed and Sikorsky are already transforming airborne logistics for the U.S. military, and they could soon transform airborne logistics for industry as well. This continues a tradition at Lockheed of making bolt-on acquisitions that strengthen the company’s overall product portfolio.
Lockheed Martin investors are paid a very solid 3.07% dividend. The RBC price target is $244, while the consensus target is posted at $235.20. The stock closed Tuesday at $215.15
Honeywell International
This is a big cap multinational that makes sense for investors looking for defense and aerospace exposure, and diversification as well. Honeywell International Inc. (NYSE: HON) is a diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes and industry; turbochargers; and performance materials. The company has been in the news recently as a proposed merger with United Technologies looks off the board for now due to antitrust concerns.
The company recently announced that Honeywell’s industrial cybersecurity business is now offering the Palo Alto Networks Next-Generation Security Platform to industrial customers. The collaboration enables customers to better prevent cyberattacks against their Process Control Networks (PCNs) and Operational Technology (OT) environments in order to protect their assets and maximize production uptime and safety. This is a part of the Honeywell business that many on Wall Street are very excited about.
Honeywell investors are paid a 2.3% dividend. The RBC price target is posted at $121, and the consensus price objective is $115.29. The stock closed Tuesday at $103.64 a share.
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These stocks rated Outperform at RBC are all solid additions to conservative growth and income portfolios. They all have long track records of success, and the reality is the world will always remain a dangerous place.
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