Stocks in the aerospace and defense sector, barring Boeing (BA) have been on an upswing this past year. Lockheed Martin (LMT) and Raytheon Technologies (RTX) have seen their shares soar by more than 40% and 20%, respectively, while L3Harris Technologies (LHX) has been up by around 1.8%.
In contrast, Boeing has seen its stock dip by around 1.5% past year. But even with this dip, it is evident that aerospace and defense stocks have fared remarkably well amid broader macroeconomic uncertainty.
Russia’s war on Ukraine has benefitted the overall aerospace and defense industry and has led to something of an arms race among different countries. This has been due to growing concerns that Russia and China could be threats over the long term.
In addition, recently, the U.S. Congress also gave final approval to a mammoth $858 billion military policy bill. This would increase the Pentagon’s budget by 8%. According to a New York Times report, citing data from the Center for Strategic and Budgetary Assessments this indicates a rise in the Pentagon budget of 4.3% every year over the past two years.
Lockheed Martin’s Outlook is Bullish
Shares of LMT are trading nearer to a 52-week high of $498.95 as the company has played a critical role when it comes to the West supplying arms to Ukraine against its war with Russia.
Many of LMT’s weapons are being supplied to Ukraine including HIMARS guided missiles, interceptor missiles, counter-battery radars, and guided rocket systems which have resulted in a substantial order backlog for the company.
Even with this upbeat outlook, Morgan Stanley analyst Kristine Liwag downgraded the stock to a Hold from a Buy but raised the price target to $542 from $506 on the stock. Liwag’s price target implies an upside potential of 12.5% at current levels.
Liwag pointed out that the downgrade was prompted by the gains in LMT stock but the analyst remained bullish on LMT’s “portfolio alignment to Department of Defense priorities and see the company well-positioned for the return to strategic competition.”
The analyst added, “We’ve seen a particular acceleration of opportunities related to missile and missile defense products, which we see as playing to Lockheed’s strength in both areas.”
Wall Street analysts remain sidelined about LMT stock with a Hold consensus rating based on four Buys, nine Holds, and two Sells.
L3Harris is Undervalued Relative to Peers
Shares of L3Harris got a boost recently after its $4.7 billion acquisition of Aerojet Rocketdyne. However, compared to its peer like LMT, LHX’s shares are still trading closer to its 52-week low of $202.97.
As Morgan Stanley analyst Kristine Liwag pointed out, “the relative underperformance [is] driven by the company’s 3Q22 earnings miss, lowered 2022 outlook and more cautious take on 2023.”
The analyst added that the “stock price has since reached levels, in our view, that are too attractive to ignore and we expect L3Harris to narrow the valuation gap.”
As a result, Liwag has upgraded the stock to a Buy from a Hold and raised the price target for LHX stock to $278 from $263. The analyst’s price target implies an upside potential of 35.3% at current levels.
Wall Street analysts are cautiously optimistic about LHX stock with a Moderate Buy consensus rating based on seven Buys and eight Holds.
Raytheon Poised to Soar Higher
RTX is another stock that has benefitted hugely from the war between Russia and Ukraine as there was a strong buzz last week that the U.S. Government may be getting ready to supply Ukraine with RTX’s Patriot missile system.
Back in October, the company had also announced that it was increasing the production of its Javelin anti-tank missiles to replenish the stock of U.S. weapons. RTX produces these missiles through a joint venture with Lockheed Martin. The U.S. Government has been supplying Ukraine with these missiles to repel Russian forces.
RTX is currently trading at a price-to-earnings ratio of 32.9x and for Goldman Sachs analyst Noah Poponak, RTX stock is “the best way to gain exposure to the high-quality aerospace aftermarket as well as higher global defense spend without overweighting either.”
Analysts are cautiously optimistic about RTX stock with a Moderate Buy consensus rating based on nine Buys and four Holds.
Supply Chain Issues Could Hamper Boeing
Boeing has been doing exceedingly well when it comes to bagging orders as evidenced by the Dreamliner order from UAL. However, the aerospace giant’s CEO David Calhoun recently told CNBC that 2023 could prove to be a tough year for the company in terms of supply chain bottlenecks.
However, Calhoun was hopeful that the situation could improve in 2024. He told CNBC, “This is not a one-quarter, two-quarter fix. This is a steady whack-a-mole kind of situation and that’s what we’re doing.”
The supply chain issues aside, BA stock has still performed relatively better to the S&P 500 (SPY) index. While the SPY has declined by around 16.4% in the past year, BA has lost only 1.5% in value.
However, Wall Street analysts remain cautiously optimistic about BA stock with a Moderate Buy consensus rating based on 12 Buys, three Holds, and one Sell.