Argus Research Targets Buys in Aerospace & Defense

10/29/2018 5:00 am EST

Focus: INDUSTRIALS

John Eade

Chairman and CEO, Argus Research Group

The political drama continues to unfold in Washington, DC. But defense spending — which has been a hot button in the past — is now receiving bi-partisan support, explains John Eade, analyst and president of Argus Research, a leading independent Wall Street research firm.

The Senate approved by a vote of 93-7 to spend $675 billion, up 3% year over year, on DOD programs such as Navy ships and submarines, F-35 aircraft and Black Hawk and Apache helicopters. The budget backdrop for the Aerospace & Defense companies is certainly more positive than it was during the dark days of budget sequestration.

Here are four Argus buy-rated companies in the Aerospace & Defense sector that could benefit from a boost to defense spending:

Lockheed Martin Corp. (LMT)

Lockheed has consistently surprised the Street in recent years, regardless of whether defense spending is rising or falling. We have a favorable view of the company's focus on international revenue diversification (now 25% of sales), and expect increased geopolitical tension to benefit sales and earnings going forward.

The company is mindful of shareholder returns and has raised the dividend at a double-digit rate for the past 15 years while also aggressively buying back stock.

Northrop Grumman Corp. (NOC)

Northrop Grumman is a leading global defense contractor with a focus on aerospace and, increasingly, electronic programs including cybersecurity. The company's balance sheet is clean, and management has a history of meeting and beating analyst expectations. Management is also aggressively increasing the dividend, with two hikes in the past year.

Raytheon Co. (RTN)

We expect management's focus on its international and cybersecurity businesses to generate stronger growth over the next three to five years. RTN's business mix appears favorable compared to that of most defense industry peers.

And given rising geopolitical threats, we like its emphasis on advanced missile defense, electronic warfare and cybersecurity systems. The company is also generating strong cash flow and aggressively returning cash to shareholders through increased dividends and share buybacks.

General Dynamics Corp. (GD)

General Dynamics' diversified business mix is attractive compared to those of many peers, as a relatively low 60% of revenue comes from the U.S. government - thus reducing the company's exposure to the budget debates in Washington.

Management is focused on driving growth through modest sales increases, margin improvement, and share buybacks, and has a history of delivering positive EPS surprises. The company is also aggressively returning cash to shareholders through increased dividends.

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