The ongoing trade war with China, escalating violence in the Middle East and the recent cyberattack on Colonial Pipeline are reminders for investors that the global geopolitical environment is uncertain. Bank of America analyst Ronald Epstein says defense stocks entered 2020 at extremely low forward earnings multiples relative to their historical norms, making them a great buy for long-term value investors. Epstein projects that the U.S. defense budget will continue to grow by 0.5% annually through 2025, creating earnings tailwinds for top defense stocks. Here are eight defense stocks to buy today, according to Bank of America.
Huntington Ingalls Industries
Huntington Ingalls Industries (HII) builds ships and amphibious vehicles for the U.S. Navy, including nuclear-powered aircraft carriers, submarines and other vessels. Epstein says Huntington has a large backlog of ship orders that creates long-term earnings visibility for investors. Also, the company's cash flow provides an opportunity for share buybacks and potential merger and acquisition deals. Epstein says Huntington Ingalls is one of the biggest winners from the Department of Defense's Indo-Pacific strategy. He projects $2.6 billion in free cash flow from 2022 through 2025. Bank of America has a "buy" rating and a $255 price target for HII stock.
Raytheon Technologies Corp.
Raytheon Technologies (RTX) is the defense behemoth created by the 2020 merger of Raytheon and United Technologies. Epstein says Raytheon is his top stock pick among large-cap aerospace and defense stocks in 2021. While the company's commercial aerospace business may continue to face headwinds in the near term, Epstein says Raytheon generates plenty of cash flow to offset the impact of the temporary global travel disruption. The company recently boosted its dividend by 7% and increased its 2021 share buyback target by 33%. Bank of America has a "buy" rating and a $95 price target for RTX stock.
General Dynamics Corp.
General Dynamics (GD) produces a wide range of vehicles and systems for the U.S. military. Epstein says General Dynamics' first-quarter numbers were impressive, including 7.3% revenue growth, 10% operating margins and positive growth in each of its segments. Looking ahead, Epstein says the company's aerospace margins will likely improve once its Gulfstream G700 business jet goes into service. Epstein projects that General Dynamics' earnings-per-share growth will accelerate from 2.7% in 2021 to 4.9% in 2022 and 11.8% in 2023. Bank of America has a "buy" rating and a $205 price target for GD stock.
Northrop Grumman Corp.
Northrop Grumman (NOC) is one of the world's largest weapons and military technology producers. Epstein says Northrop's combination of a best-in-class national security portfolio and the capacity for aggressive share buybacks makes the stock a winner for long-term investors. Among the entire defense group, Epstein says Northrop's nuclear, technology and space focus gives the company the best portfolio that is most in line with the national security goals of the Joe Biden administration. Northrop also recently secured a $2.6 billion contract from the Missile Defense Agency. Bank of America has a "buy" rating and a $455 price target for NOC stock.
Lockheed Martin Corp.
Lockheed Martin (LMT) develops advanced technology systems, including missile systems, and is the primary contractor for the F-35 fighter jet. Epstein says Lockheed has an impressive backlog worth about 2.2 times the company's 2021 sales projections, one of the largest backlogs among its defense peers. Also, Epstein says Lockheed's focus on hypersonics, development of a sixth-generation fighter jet and classified strategic and missile defense projects should serve investors well in coming years. Finally, Epstein says Lockheed Martin has a strong free cash flow generation profile. Bank of America has a "buy" rating and a $480 price target for LMT stock.
Booz Allen Hamilton Holding Corp.
Booz Allen Hamilton (BAH) provides consulting and technology services to the U.S. government. Booz Allen shares are down about 5% in 2021 after the company cut its near-term revenue guidance earlier this year. However, Epstein says its long-term growth outlook remains intact, and Booz Allen has a "compelling portfolio of mission-oriented cutting edge technologies." He says Booz Allen is well positioned to benefit from the U.S. government's increasing focus on cybersecurity, the necessity of which was highlighted by the recent pipeline hack. Bank of America has a "buy" rating and a $110 price target for BAH stock.
BWX Technologies (BWXT) supplies U.S. submarines and carriers with nuclear reactors, fuel and associated services. BWX was recently awarded a $2.2 billion contract from the Naval Nuclear Propulsion Program that includes components and fuel for two Virginia-class submarines. Clarity on the Navy's long-term shipbuilding plan could provide additional upside for BWX investors, Epstein says. BWX is also working to diversify its business. Epstein projects EPS growth of 0.7% in 2021, 6.6% in 2022 and 7.7% in 2023. Bank of America has a "buy" rating and a $78 price target for BWXT stock.
L3Harris Technologies (LHX) is an aerospace and defense company focused on technology-driven mission solutions. Epstein says there are plenty of reasons to like L3Harris as a long-term investment, including its expertise in priority mission capabilities, its robust cash flow generation, its opportunities for shareholder-friendly capital returns and its ongoing revenue synergy opportunities following the 2019 merger of L3 Technologies and Harris Corporation. Epstein projects double-digit EPS growth in both 2021 and 2022 after the company exceeded his earnings estimates in the first quarter. Bank of America has a "buy" rating and a $260 price target for LHX stock.
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