With Russia’s invasion of Ukraine, U.S. defense stocks could soar.
All on expectations global defense spending will only rise in response.
For one, “Given Russia’s significant military operations in Ukraine, it is now ‘worthwhile to reconsider’ the effects of the war on global defense budgets, says Morningstar analyst Burkett Huey, as quoted by Forbes.
Two, according to Todd Harrison, director for budget analysis at the Center for Strategic and International Studies, as quoted by Defense One, “The political reality is that the Russian incursion in Ukraine has created much more support for an increase in the defense budget, At a minimum, I think [Democrats] won’t oppose it because it’s hard to, politically, at this point given what we’re seeing.”
Three, Reuters is also reporting the Biden Administration is expected to request another $800 billion for overall defense spending, including $773 billion for the Defense Department.
That being said, investors may want to consider these five opportunities.
Opportunity No. 1 — iShares U.S. Aerospace & Defense ETF (ITA)
With an expense ratio of 0.42%, the ETF provides exposure to companies that manufacture commercial and military aircrafts and other defense equipment, according to BlackRock.
Some of its top holdings include Raytheon Technologies (RTX), Boeing (BA), Lockheed Martin (LMT), L3Harris Technologies (LHX), and General Dynamics (GD), for example.
Opportunity No. 2 – Invesco Aerospace & Defense ETF (PPA)
With an expense ratio of 0.61%, the PPA ETF offers exposure to companies involved in the development manufacturing, operations and support of US defense, homeland security and aerospace operations.
Some of its top holdings include Lockheed Martin, Boeing, Raytheon Technologies, Honeywell, General Dynamics, L3Harris Technologies, and Textron to name a few.
Opportunity No. 3 — Raytheon Technologies Corp. (RTX)
One of the top defense stocks to own is Raytheon Technologies.
After all, the company provides defense systems needed to strengthen global security, such as systems for missile warning and surveillance, fighter jet platforms, hypersonic technology, and air dominance and cybersecurity technologies.
In addition, the company just raised its dividend to 51 cents, payable on Mar. 24, 2022, to shareowners of record at the close of business on Feb. 25, 2022.
Analysts appear to like the stock, too.
Morgan Stanley analyst Kristine Liwag raised the firm’s price target to $118.00 from $110 “on the back of a strong bottom line beat but an outlook that was largely below consensus for 2022. Management guided EPS to a range of $4.60-$4.80 compared with Consensus of $4.95,” according to Barron’s.
“Despite the lower guidance, the analyst believes it is due to conservatism and reiterated an Overweight rating, stating “From our conversations with investors, despite the lower than expected outlook, it is viewed as a conservative guide based upon the pace of re-opening for aerospace,” they added.
Opportunity No. 4 – Lockheed Martin (LMT)
Lockheed Martin is one of the top bets in the defense sector with a reliable dividend, and plenty of solid defense contracts with the U.S. government. Most recently, the company announced it received a $166.6 million contract modification from the U.S. Navy to provide, install, and configure 22 F-35 aircraft training devices.
In addition, as noted by TheFly.com:
“Wolfe Research analyst Michael Maugeri upgraded Lockheed Martin to Outperform from Peer Perform with a $467 price target as he is upgrading the Defense sector to Market Overweight following Russia’s invasion of Ukraine last week. With the global perceived threat environment having ‘significantly worsened,’ he expects stronger international military spending and a better U.S. DoD budget environment that creates more supportive valuation for stocks in the sector.”
Opportunity No. 5 – L3Harris Technologies (LHX)
Investors may also want to keep an eye on LHX. Not only did the company just raise its dividend 10% to $1.12, it received a $3.69 billion contract from the U.S. Navy for the procurement of Portable Radios and Ancillary Parts Program. Plus, with the Russia-Ukraine situation getting worse, LHX should benefit from a renewed focus on intelligence.
With regards to recent earnings, LHX posted a better than expected profit for the fourth quarter. Unfortunately, sales fell short. It earned $3.30 per share, up 5% year over year on sales of $4.35 billion. Analysts were looking for sale of $4.49 billion. Going forward, the company expects to posted adjusted earnings in the range of $13.35 and $13.65 per share and revenue between $17.3 and $17.7 billion.