[cnxvideo id=”625452″ placement=”ros”]One of the platforms that President Trump relied heavily on during the campaign was rebuilding our military, and with good reason. Despite the fact that defense spending dominates our budget, and was approximately 54% of discretionary spending in 2015, many in Washington feel that we are woefully behind in many areas and need to upgrade and increase capability and armaments. One top Wall Street firm feels that we are in the early stages of defense spending growth that could last a decade.
A new Merrill Lynch research report make the case that some media, industry analysts and, not surprisingly, lobbyists, question whether the president’s $603 billion defense discretionary spending is actually large enough. With the sector underperforming recently, the analysts focus on four companies that look like great stocks to add now. All are rated Buy.
General Dynamics
This company, like other major defense prime contractors, had a very solid year in 2016 and remains one the best ideas at Jefferies in the sector. General Dynamics Corp. (NYSE: GD) is engaged in business aviation, land and expeditionary combat vehicles and systems, armaments, munitions, shipbuilding and marine systems, and information systems and technologies.
Major products include Virginia-class nuclear-powered submarine and Ohio class replacement, Arleigh Burke-class Aegis, Abrams M1A2 tank, Stryker 8-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems.
Shareholders are paid a 1.77% dividend. The Merrill Lynch price target for the stock is $210, and the Wall Street consensus target is $203.06. Shares closed most recently at $190.94.
Lockheed Martin
This is a top aerospace and defense stock to buy, and many on Wall Street are expecting a very solid continuation of U.S. and foreign defense spending. Lockheed Martin Corp. (NYSE: LMT) researches, designs, develops, manufactures, integrates, operates and sustains advanced technology systems, products and services. It also provides a wide range of defense electronics products and IT services.
Being the Pentagon’s prime contractor, Lockheed Martin offers a diverse portfolio of global aerospace, defense, security and advanced technologies. Its leveraged presence in the Army, Air Force, Navy and IT programs guarantees a steady inflow of follow-on orders, not only from the U.S. government but also from a large number of foreign allies of the nation.
The company recently secured a contract for providing flight-line spare parts. Valued at $750 million, this is a five-year base contract with a three-year and a two-year option period. Lockheed Martin will complete work under this agreement utilizing fiscal 2017 through 2022 defense working capital funds and expects to finish the project by March 31, 2022.
Shareholders receive a 2.72% dividend. The Merrill Lynch price objective is $300, while the consensus price target is $282.68. The shares closed Monday at $267.72.
Northrop Grumman
This top defense company was ranked as one of the top five defense contractors by sales last year. Northrop Grumman Corp. (NYSE: NOC) provides innovative systems, products and solutions in unmanned systems, cyber, C4ISR and logistics and modernization to government and commercial customers worldwide. The Aerospace Systems segment designs, develops, integrates and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics and other systems and subsystems.
The Information Systems segment offers advanced solutions for Department of Defense, national intelligence, federal civilian, state, international and commercial customers. This segment provides products and services primarily in the fields of command and control, communications, cyber, air and missile defense, intelligence processing, civil security, health information technology, and government support systems.
The Technical Services segment provides logistics, modernization and sustainment services, as well as other advanced technology and engineering services, including space, missile defense, nuclear security, training and simulation services.
Shareholders are paid a 1.5% dividend. Merrill Lynch has a $265 price target, and the consensus target is $258.06. The shares closed Monday at $242.92.
Raytheon
This company has a diversified mix of business and remains a favorite at Merrill Lynch. Raytheon Corp. (NYSE: RTN) is an industry leader in defense, government electronics, space, information technology and technical services.
The analysts have noted that the strong demand for missiles is a big positive for the company as domestic bookings were up 18%. The company reported mostly inline fourth-quarter results, and forward guidance also matched the analysts’ expectations.
Shareholders are paid a 1.9% dividend. The Merrill Lynch price objective is $185. The consensus is posted at $167.56. The shares closed Monday at $153.32.
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These four companies represent the very best in the industry, and their stocks make very good sense for long-term growth accounts. All have had strong runs since the election, despite recent underperformance, so investors may want to buy partial positions here and see if a correction doesn’t lower prices.
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