Military

The Trump Defense Budget Request Is Huge: 5 Big Winners to Buy Now

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One thing that President Trump campaigned on, and his followers were very receptive to, was rebuilding our military strength, which has waned in recent years. With the release recently of the first budget from the new administration, constituents should be glad to know that the request from the president came in at $639 billion for defense, which was above most Wall Street estimates of $620 billion.

In a new Merrill Lynch research report, the firm’s outstanding Defense team, note that one of the positive surprises is a budget request submitted by the Navy for a second Virginia class submarine. That and just the overall size of the request from the administration are seen as very positive for the sector.

We focused on five Buy-rated stocks that Merrill Lynch sees as big beneficiaries of the latest proposed budget.

BWX Technologies

This is an under-the-radar stock with solid upside potential. BWX Technologies Inc. (NYSE: BWXT) primarily supplies U.S. submarines and carriers with naval nuclear reactors and associated nuclear fuel and refueling services, as well as other nuclear components. The Merrill Lynch analysts see the company as a significant beneficiary of U.S. investment to support a 355-ship Navy.

This is also the first of three companies that the analysts see as having a direct benefit from the new request for the second Virginia-class submarine. The company also recently reported strong first-quarter results, with revenues up more than 17% year over year.

The Merrill Lynch price target for the stock is $55, and the Wall Street consensus target is $55.83 per share. The stock closed Wednesday at $48.27 a share.

General Dynamics

This company, like other major defense prime contractors, has had a very solid year and remains one the best ideas at Merrill Lynch in the space. 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.

The company reported stunning first-quarter earnings that were well above the analysts’ consensus estimate. The earnings beat was driven by better than expected margins and lower taxes.

Shareholders in General Dynamics are paid a 1.68% dividend. Merrill Lynch has a $225 price target on the shares, and the consensus target price is $210.06. Shares closed on Wednesday at $199.98 apiece.

Huntington Ingalls

This is another company that is more off the radar, but its shares also have outstanding upside potential. Huntington Ingalls Industries Inc. (NYSE: HII) engages in designing, building, overhauling and repairing ships primarily for the U.S. Navy and the U.S. Coast Guard. The company is involved in the design and construction of non-nuclear ships, comprising amphibious assault ships that include deck amphibious ships and transport dock ships; surface combatants; and national security cutters.

The company also provides nuclear-powered ships, such as aircraft carriers and submarines; refueling, overhaul and inactivation services for nuclear-powered ships; and fleet support services comprising depot maintenance, modernization, repairs, logistics and technical support and planning yard services for naval and commercial vessels.

Huntington Ingalls is expected to be another big beneficiary of the additional Virginia-class nuclear submarine build. In addition, the company offers naval architecture and marine engineering, ship system assessment, maintenance engineering and logistics services, as well as a range of support services to commercial nuclear power plants, nuclear energy facilities, fossil power plants and other industrial facilities.

Huntington Ingalls shareholders are paid a 1.23% dividend. The $250 Merrill Lynch price target compares with a consensus price objective of $211.36, as well as Wednesday’s closing share price of $195.25.

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.

The company operates in five principal business segments: Aeronautics, Missiles and Fire Control, Mission Systems and Training, Space Systems, and Information Systems & Global Solutions.

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.

Lockheed Martin shareholders are paid a very solid 2.6% dividend. Merrill Lynch has set its price objective at $305, while the posted consensus target price is at $285.42. The stock closed trading most recently at $280.05 a share.

Raytheon

This company has a diversified mix of businesses and remains a favorite at Merrill Lynch. Raytheon Co. (NYSE: RTN) is an industry leader in defense, government electronics, space, information technology and technical services. Top Wall Street 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 solid results for the first quarter, with revenues were up more than 3% year over year in the quarter and the total backlog up more than 5%. Many top analysts feel that as the aerospace and defense segment grows, Raytheon will continue to be a key figure in the market, something that most likely will continue for years to come.

Raytheon investors are paid a 1.97% dividend. The Merrill Lynch price objective is $185. The consensus target price is $172.06, and the shares closed most recently at $162.14.

These five companies represent among the very best in the industry, and their shares make very good sense for long-term growth accounts. All have had strong runs since the election, so investors may want to buy partial positions here and see if a correction doesn’t lower prices.

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