Is It Time to Sell Defense Stocks?

The U.S. Congress is currently debating the 2017 National Defense Authorization Act (NDAA), and it’s really anyone’s guess what the outcome will be. The U.S. House of Representatives passed its version of the NDAA last week and the Senate is expected to begin reviewing its version next week. The Obama administration has already raised objections to various provisions of both versions.

The Senate version seeks $602 billion for the 2017 defense budget, split into two pieces: $543 billion for the base budget and $59 billion for what are known as overseas contingency operations (OCO) for war fighting. The House bill authorizes $610 billion in a $551 billion base budget and $59 billion in OCO spending, however $23 billion of the OCO piece would be used to meet base budget requirements. The administration request matches the Senate version.

There is always some uncertainty about how the politics of national defense will play out, and it is probably that uncertainty that led to some price target cuts on leading defense contractors in the past week or so. We’ve noted some recent changes on three of the nation’s largest defense contractors.

Lockheed Martin Corp. (NYSE: LMT) was downgraded from Outperform to Sector Perform at RBC Capital Markets. The analysts’ price target on the stock is $244. Stifel also downgraded Lockheed, dropping it from Buy to Hold. Lockheed’s shares closed at $24.07 on Friday, up 0.5% for the day, in a 52-week trading range of $181.91 to $245.37. The consensus price target on the stock is $242.44 and the high target is $273.
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RBC Capital Markets raised its rating on L-3 Communications Holdings Inc. (NYSE: LLL) from Sector Perform to Outperform and also raised its price target on the stock from $137 to $150 a share. Drexel Hamilton also raised L-3’s rating from Hold to Buy with a $152 price target. The company’s shares closed at $138.20 on Friday, up 1% for the day, in a 52-week range of $101.11 to $138.64. The high was posted Friday, and the consensus price target on the stock is $145.60.

Northrop Grumman Corp. (NYSE: NOC) took a downgrade from Outperform to Sector Perform from RBC Capital Markets, with a price target of $222. Northrop had recently boosted its quarterly dividend by 12.5% to $0.90 per share, but that didn’t deter the downgrade. Shares closed at $212.72 on Friday, in a 52-week range of $152.31 to $218.84. The consensus price target is $217.47.