Escalating geopolitical turmoil, as the Russia-Ukraine war rages on, has led countries to increase their defense spending. For instance, the European Union is targeting a $74 million increase in defense spending over the next three years.
Moreover, the U.S. House of Representatives recently backed the legislation paving the way for the defense budget to exceed $800 billion next year, $45 billion more than proposed by President Joe Biden.
Furthermore, as per the Aerospace & Defense Global Market Report 2022, the industry is expected to grow at a CAGR of 8.5% to reach $1.05 trillion in 2026. Hence, we think the fundamentally strong stock Lockheed Martin Corporation (LMT) could be a solid buy now.
However, defense organizations have come under cost pressures due to the sky-high inflation impacting the prices for raw materials and other goods. Hence, the fundamentally weak stock The Boeing Company (BA) might be best avoided now.
Stock to Buy:
Lockheed Martin Corporation (LMT)
LMT is a security and aerospace company engaged in the research, design, development, manufacture, and integration of technology systems, products, and services worldwide. It operates through four segments Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space.
On November 16, LMT and Microsoft Corporation (MSFT) announced a landmark expansion of their strategic relationship to help power the next generation of technology for the Department of Defense (DOD). This partnership should help the company strengthen its position in the industry.
On September 30, LMT declared a quarterly dividend of $3, payable to stockholders on December 30, 2022. The dividend represents an increase of $0.20 per share over the last quarter. This reflects the company’s solid cash generation ability.
LMT’s net sales increased 3.5% year-over-year to $16.58 billion for the quarter ended September 25, 2022, while its net earnings increased 189.6% year-over-year to $1.78 billion. In addition, its non-GAAP earnings per share came in at $6.87, representing an increase of 4.1% from the prior-year quarter.
Street expects LMT’s EPS and revenue for the fourth quarter ending December 2022 to increase 1.7% and 3% year-over-year to $7.37 and $18.27 billion, respectively. It has a commendable earnings surprise history as it surpassed the consensus EPS estimates in three of the trailing four quarters.
The stock has gained 39% over the past year and 17.3% over the past three months to close the last trading session at $480.22.
LMT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It also has a B grade for Sentiment and Quality. Out of the 73 stocks in the Air/Defense Services industry, LMT is ranked #3.
Click here to see the other ratings of LMT for Growth, Momentum, Value, and Stability.
Stock to Sell:
The Boeing Company (BA)
BA designs, manufactures, and sells commercial jetliners, military aircraft, satellites, missile defense systems, human space flight, and launch systems and services worldwide. It operates through Commercial Airplanes (BCA); Defense, Space & Security (BDS); Global Services (BGS); and Boeing Capital (BCC) segments.
In terms of its forward EV/Sales, BA is trading at 2.34x, 42.1% higher than the industry average of 1.64x. The stock’s forward Price/Cash Flow multiple of 47.86 is 269.1% higher than the industry average of 12.97.
For the fiscal third quarter ended September 30, 2022, BA’s total cost and expenses widened 23.7% year-over-year to $16.78 billion. The company’s non-GAAP core operating loss came in at $3.08 billion, compared to non-GAAP core operating earnings of $59 million on September 30, 2021.
BA’s non-GAAP core loss per share came in at $6.18, representing an increase of 930% year-over-year.
Analysts expect a negative EPS of $8.59 for the fiscal year ending December 2022. It missed Street EPS and revenue estimates in each of the trailing four quarters.
The stock has lost 5.2% over the past year and 7.1% year-to-date to close the last trading session at $187.13.
BA’s POWR Ratings reflect this bleak outlook. The stock has an overall rating of D, which equates to Sell in our proprietary rating system.
BA has a D grade for Stability. It is ranked #54 within the same industry.
Click here to see the additional ratings for BA’s Growth, Value, Momentum, Quality, and Sentiment.
LMT shares were trading at $486.55 per share on Wednesday afternoon, up $6.33 (+1.32%). Year-to-date, LMT has gained 40.49%, versus a -13.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
1 Defense Stock to Buy Before the End of the Year and 1 to Sell StockNews.com
