Why This Analyst Sees 5 Top Defense Stocks Rebounding in 2021

The largest U.S. defense contractors had a poor 2020. Two of the five largest defense contractors posted share price declines of 52% and 34% in 2020, according to an industry update published earlier this week by analysts at Canaccord Genuity.

Before looking at how these stocks are faring so far this year, here’s a look at how they performed in 2020.

Lockheed Martin Co. (NYSE: LMT), the largest of the five, posted a dip of 8.8% in its share price last year. Out of total 2019 revenue of $59.8 billion, $47.1 billion (80%) of Lockheed’s revenue for the year came from the company’s defense contracts. In 2020, Lockheed reported revenue of $65.4 billion and, using the prior year as a guide, about $53.3 billion of that total would come from the U.S. Department of Defense.

Boeing Co. (NYSE: BA), the second-largest of the five, saw its share price fall by 34% in 2020, largely due to the grounding of the company’s 737 Max passenger jets and the massive drop in global airline traffic due to the COVID-19 pandemic. In 2019, Boeing’s defense-related revenue totaled $26.3 billion (34.3%) of the company’s total $76.6 billion in revenue. Boeing’s 2020 revenue fell by 24% to $58.2 billion, and defense-related revenue was essentially flat, accounting for about 20% of full-year sales.

The nation’s third-largest defense contractor, General Dynamics Corp. (NYSE: GD), dropped 15.6% from its share price in 2020. The company attracted some $16.5 billion in defense contracts in 2019 from a total of $21 billion in total federal contracts. The company’s defense business accounted for about 42% of total revenue. Applying that percentage to total 2020 revenue of  $37.9 billion, defense contracts in 2020 accounted for about 16% of its revenue.

Number four Raytheon Technologies Inc. (NYSE: RTX) suffered a share price decline of 52% in 2020. Raytheon completed its merger with United Technologies in April, and the company’s exposure to commercial aviation through its Pratt & Whitney jet engine division made the year a tough one. In 2019, Raytheon snagged $15.6 billion in defense department contracts, nearly 97% of its pre-merger revenue for the year. Lockheed accounted for $9.3 billion in defense contracts in the pre-merger year.

And Northrop Grumman Corp. (NYSE: NOC) saw its share price drop by 11.4% in 2020. Defense contracts accounted for $14.2 billion (42%) of the company’s total 2019 revenue of $33.8 billion. Extrapolating that percentage to 2020, defense revenue would have totaled around $15.5 billion.

This year is off to a good start, according to Canaccord Genuity. Boeing’s stock is up nearly 18% for the year to date and General Dynamics has seen its share price rise by 16%. Raytheon stock is 7.7% higher for the year. Only Lockheed (down 4.3% year to date) and Northrop (1.7% lower) are lagging.

The Defense Department’s fiscal 2022 budget request totaled $702 billion, short of the $715 billion the Trump administration wanted to spend on defense. The Biden administration has indicated it expects to submit a defense budget request of around $706 billion for the 2022 fiscal year, along with what Canaccord Genuity analysts call “a paradigm shift towards progressive expectations of massive defense cuts.”

The analysts also noted that through February, Defense Department investments have been increasing in the high-single digits for the 2021 fiscal year that started in October but that the rate of growth is slowing. So far this fiscal year, defense spending is up 8% compared to growth of 13% in 2020 and 12% in 2019.

The analysts conclude: “We remain bullish on the outlook for defense stocks in our universe based on what we believe will continue to be strong fundamentals. However, the challenge will be for the defense stocks to exceed expectations.”

Boeing stock traded up more than 6% in the noon hour Friday, at $265.75 in a 52-week range of $89.00 to $267.89, and the high was posted earlier in the day. The company announced an order Friday morning for 24 of its 737 Max 8 jets, and rumors suggest an even larger order may be coming from Southwest Airlines.

Lockheed shares traded up about 0.5% to $341.40, in a 52-week range of $266.11 to $417.62. The mean price target on the stock is $411.62.

Raytheon shares traded up about 2.2%, at $78.75 in a 52-week range of $43.44 to $78.83, a new high set earlier today. The price target is $84.53. Friday’s new high is likely a halo effect from the Boeing announcement and the effect that will have on Raytheon’s Pratt & Whitney segment.

General Dynamics stock traded up about 2% to $176.04. It posted a new 52-week high of $76.10 earlier. The 52-week low is $100.55, and the price target on the stock is $167.67.

Northrop shares traded up nearly 1% to $302.13, in a 52-week range of $263.31 to $357.12. The consensus price target is $367.83.

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