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Lockheed Martin or Raytheon: Which Defense Stock Has More Upside Potential?
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Lockheed Martin or Raytheon: Which Defense Stock Has More Upside Potential?

Governments across the world are fighting the COVID-19 threat and spending billions of dollars in addressing the pandemic. Despite the COVID crisis, the defense spending by most of the countries might not change drastically given the growing geopolitical tensions.

According to Stockholm International Peace Research Institute or SIPRI, the global military expenditure rose 3.6% to $1.92 trillion in 2019 with the US topping the list with military spending of $732 billion (way more than China’s $261 billion expenditure- the second-largest military spender). A defense bill of $740.5 billion is being planned for 2021 in the US compared to $738 billion in 2020.    

With this in mind, we will use the TipRanks’ Stock Comparison tool to compare two leading defense companies Lockheed Martin and Raytheon Technologies to see which stock offers a more compelling investment opportunity.

Lockheed Martin (LMT)

Lockheed Martin is the world’s largest pure-play defense company. Its main customer is the US government, which accounted for 76% of its $32 billion net sales in the first half of 2020. International customers generated 23% of the company’s sales in the first half while 1% of sales came from US commercial and other customers.  

The defense contractor is widely known for its F-35 Joint Strike Fighter, which accounted for 27% of the company’s consolidated sales in 2019. Lockheed is also considered a leader in hypersonics and its THAAD or Terminal High Altitude Area Defense systems are one of the most advanced missile systems.

Despite COVID-19 hurting the company’s supply chain, Lockheed Martin’s 2Q revenue grew 12.4% Y/Y to $16.2 billion led by increased volumes in the Aeronautics and Missiles and Fire Control segments. EPS grew by 12.4% to $5.79. Following its 2Q performance, the company raised its 2020 guidance and expects sales between $63.5 billion to $65 billion and EPS of $23.75 to $24.05.   

Lockheed received about $22 billion in orders in 2Q and ended the quarter with a strong order backlog of $150.3 billion. Of the new orders booked in 2Q, $7 billion were for the F-35. The company’s order backlog reflects the strength of its broad portfolio.  

One of the most notable recent updates about Lockheed is the $62 billion ten-year contract that it won in August for the production of F-16 fighter planes for foreign military allies of the US.

Lockheed Martin is down 0.2% year-to-date and the average analyst price target of $436.50 indicates an upside potential of 12.3% in the coming months.

Recently, Goldman Sachs analyst Noah Poponak removed Lockheed Martin from the firm’s Conviction List while retaining a Buy rating. He lowered his price target for Lockheed to $447 from $501. The analyst believes that new order bookings continue to outpace the industry on average, “supporting further outgrowth ahead.”

However, the analyst sees more upside in aerospace stocks like Boeing and Raytheon Technologies, two stocks which he added to Goldman’s Conviction List. (See LMT stock analysis on TipRanks)

Meanwhile, the Street is cautiously optimistic about Lockheed Martin. A Moderate Buy consensus for the leading defense company is based on 6 Buys, 3 Holds and no Sell ratings.

Raytheon Technologies (RTX)

Raytheon Technologies was formed in April 2020 with the merger of defense contractor Raytheon Company and aerospace company United Technologies following the latter’s spin-offs of its Carrier and Otis businesses. The rationale behind the merger was to leverage the technology and research and development capabilities of both the companies to capture opportunities in the high-growth segments of aerospace and defense.

However, the pandemic caused unprecedented damage to the commercial aerospace sector. Rayetheon expects that it will take at least until 2023 for commercial air traffic to recover to 2019 levels. Meanwhile, the company has announced efforts to cut $2 billion in costs this year and save $4 billion in cash. It plans to slash 15,000 jobs amid the current crisis.

Raytheon’s net sales 2Q increased 24.1% Y/Y to $14.1 billion as the growth in the company’s defense business more than offset the slump in the aerospace side. Adjusted EPS plunged about 68% to $0.40.

The company ended 2Q with a backlog of $158.7 billion, of which $85.6 billion was from commercial aerospace and $73.1 billion was from defense. Raytheon sees sequential sales improvement in the second half of the year, with modest improvement in Q3 and then a better Q4.

On Sept. 20, Goldman Sachs analyst Noah Poponak added Raytheon to the firm’s Conviction Buy list while keeping a Buy rating. The analyst raised the price target for Raytheon to $86 from $84. Poponak views the company’s aftermarket as the best sub-market within Aerospace over the long term and notes that it accounts for about 45% of Raytheon’s Aerospace revenue.

The analyst believes that the recovery in global air travel could be “quicker from here than broad expectations for a recovery by 2023-2024,” and also argues that Raytheon’s Defense business is well-positioned in key end market categories. He adds that the strong trailing book to bill supports visible revenue growth going forward. (See RTX stock analysis on TipRanks)

The Street mirrors Poponak’s bullish stance and has a Strong Buy consensus based on 7 Buys, 2 Holds and no Sell ratings. Raytheon stock is down about 35% so far this year but has an upside potential of 36.5% in the coming months as indicated by the average analyst price target of $78.63.

Conclusion

Lockheed Martin definitely is a strong defense play with an impressive order backlog. But, Raytheon currently looks to be the better stock based on a higher dividend yield of 3.23% compared to Lockheed’s 2.66% and a higher upside potential.

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment

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