American defense stocks, including Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC), held their own far better than the S&P 500 (SPX) recently, as the Fed’s comments dragged markets lower. In this piece, we used TipRanks’ Comparison Tool to weigh which defense stock is capable of greater upside over the year ahead. Analysts expect the most upside potential from LMT stock, but let’s take a look at each company in more detail to determine if that is justified.
The relative resilience of the defense stocks was thanks in part to renewed geopolitical jitters, with Vladimir Putin calling to mobilize more troops in its ongoing war in Ukraine.
Undoubtedly, the Ukraine-Russia crisis has acted as an overhang on broader markets. With a recession on the horizon and higher interest rates, it seems as though defense plays are one of the last pillars of stability, with the S&P 500 falling into a bear market (a 20% fall from peak levels) once again.
As geopolitical tensions remain elevated, it’s the top defense stocks that could be (mostly) spared from any further market carnage. At this juncture, Lockheed Martin and Northrop Grumman are among my favorite defense stocks due to their reasonable price tags and reliable dividends.
Lockheed Martin (LMT)
Lockheed Martin is an aerospace and defense kingpin with a $112 billion market cap. The firm, which derives a big chunk (almost a third) of revenue from its advanced F-35 Lightning II stealth combat aircraft, is outperforming the broader S&P 500, down just 12% from its all-time high of ~$480 per share.
As macro headwinds move in, Lockheed stock seems like one of the few plays capable of hitting all-time highs by year’s end. Undoubtedly, the 0.65 beta means that shares of LMT are more capable of flying higher without being weighed down by issues troubling most other stocks. With geopolitical threats on the rise, nations around the world will have more incentive to bolster their defenses.
At this juncture, the Lightning II aircraft seems head and shoulders above the competition. The leading aircraft could help Lockheed improve upon its geographical diversification (around 25% of revenue comes from international sources). Canada is just one of the nations committed to updating its fleet to the Lightning II. It’s an expensive commitment, but it may be necessary as perceived global threats continue to rise.
Finally, with every additional order for the Lightning II will come the need for maintenance services, beefing up Lockheed’s longer-term cash flow stream.
At writing, shares trade at a very reasonable 24.4x trailing earnings and 1.7x sales. With a steady, growing 2.67%-yielding dividend, investors may wish to batten down the hatches with their portfolio with a name that could act as one of the last stable pillars in this rocky market.
What is the Price Target for LMT Stock?
Wall Street remains cautious on Lockheed Martin stock, with a “Hold” consensus rating. There are three Buys and nine Holds. The average LMT stock price target is pinned at $472.33, suggesting a modest 11.9% upside.
Northrop Grumman (NOC)
Northrop Grumman is the aerospace and defense company behind the B-2 Spirit stealth bomber. The $76.8 billion company has posted steady results throughout the year while maintaining its intriguing pipeline of next-generation defense offerings, including its latest interceptor and the B-21 Raider.
Amid escalating geopolitical tensions, Northrop Grumman stock has experienced quite a bit of multiple expansion. The stock now trades at 13.9x trailing earnings and 2.2x sales – hardly an expensive stock, but the firm has encountered supply-chain woes over the past year.
Though demand remains robust, with a nearly 1.5x bill-to-book ratio as of the latest quarter, supply-side constraints could continue to weigh on orders, moving forward.
Looking way ahead, Northrop Grumman expects to be an influential player in the militarization of space. Undoubtedly, the company’s portfolio of space products is intriguing but may be years away from living up to its full potential. In any case, Northrop seems more than able to add to its recent rally on the back of hitting its LGM-35A Sentinel rocket motor milestone.
Though the dividend yield is modest at 1.4%, its growth potential is notable. The firm is growing its payout at a rapid rate while repurchasing shares when it makes sense. Undoubtedly, management seems very committed to returning capital to its shareholders through good times and bad.
What is the Price Target for NOC Stock?
Wall Street is mildly bullish on Northrop Grumman, with a “Moderate Buy” consensus rating alongside Buys and three Holds. Despite Wall Street’s upbeat tone, the average NOC stock price target of $515.50 only implies 3.8% in expected upside over the next year.
Indeed, Northrop Grumman is a steady dividend payer for turbulent times. However, pending a further escalation of geopolitical tensions, the stock may be in a spot to trade relatively flat from here. In a bear market, though, flat is not bad!
Conclusion: Wall Street Expects More Upside from LMT Stock
Lockheed Martin and Northrop Grumman are two top-notch defense plays for nervous investors. Of the two names, Wall Street expects more upside potential from Lockheed stock. That said, with more bulls on Northrop, shares of NOC may be a steadier ship for rougher waters.