U.S. investors have been uneasy in 2018 as the international trade war escalated. But while investors consider how to play defense with their portfolios, Morningstar analyst Chris Higgins says it may be a good time to consider buying defense industry stocks, especially after the November midterm elections. The Trump administration has made defense and infrastructure spending top priorities, and Higgins says U.S. defense spending will likely continue to accelerate at least until the 2020 election season. Here are seven ways long-term investors can bet on defense stocks.
Boeing Co. (ticker: BA)
Boeing stock is up 17.8 percent in the past six months as the company’s strong fundamental performance has alleviated concerns about the trade war’s potential impact on Boeing’s China business. Higgins says Boeing’s biggest challenge will be meeting rising demand for commercial aircraft. He says Boeing’s backlog of nearly 6,000 aircraft orders will result in an uptick in production. High-margin 737 production is expected to increase by 35 percent from 42 per month in 2016 to 57 per month by 2019. Morningstar has an “overvalued” rating and $323 fair value estimate for BA stock.
Northrop Grumman Corp. (NOC)
Higgins gives Northrop Grumman CEO Wes Bush credit for boosting the company’s operating margins from the mid-single-digits back in 2004 to 12.6 percent in 2017. He says Northrop is poised to be one of the prime beneficiaries from the Trump administration’s increase in defense spending. Higgins says it’s difficult for defensive investors to find cheap defense industry stocks these days, but Northrop is one of the few names in the group that is currently trading at a valuation discount relative to peers. Morningstar has an “fairly valued” rating and $320 fair value estimate for NOC stock.
L3 Technologies (LLL)
L3 Technologies gets about 70 percent of its revenue directly from the U.S. government, meaning an increase in government defense spending is always good news for LLL stock investors. Higgins says L3 was forced to clean up its portfolio and restructure its business during the defense downturns and Iraq and Afghanistan troop drawdown of the past decade. Today’s L3 is a leaner business with higher-margin operations, and Higgins says the current environment should enable the company to continue to create long-term value for its investors. Morningstar has a “fairly valued” rating and $204 fair value estimate for LLL stock.
Lockheed Martin Corp. (LMT)
Lockheed Martin is…
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