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Defense Stocks For The Defensive Investor

Posted: Oct 21, 2009 10:39 AM by Aryeh Katz

Tickers in this Article: GD, NOC, LMT, RTN, BA

Pension related issues are front and center as the major defense contractors begin reporting quarterly earnings this week. At least two of them, Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC), have indicated that next year will see rising liabilities for retired employees, along with more uncertainty as the Pentagon resets its priorities.

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Lockheed Martin recorded large losses in the company's pension fund during last year's market meltdown, and analysts have already lowered EPS expectations for coming quarters as well. That said, the worst has likely already been built into the stock price, and the company is expected to outperform its peers going forward.

LMT trades with a trailing year P/E ratio of 10 and has a dividend yield of 3.3%. Earnings per share growth for the past five years has been a very substantial 27.41%. Last week the company unveiled the first of 18 F-16 fighter aircraft to be delivered to

Pakistan

.

Third Largest Defense Contractor
Northrop Grumman is the U.S. government's third largest defense contractor by sales. Their shares are up nearly 50% since bottoming in March and offer investors a 3.3% annual yield. They trade at a mere 0.5x last year's sales and carry a price/book ratio of 1.35.

Northrop Grumman provides the armed services with everything from ships to spacecraft to cyberwarfare systems. This week, NOC was granted a $6 million boost in its contract with the navy's submarine service yard in Newport News, Virginia.

In the airplane business, The Boeing Company (NYSE:BA) is a household name. With almost a century's worth of history, Boeing has been a pioneer in the design and manufacture of military aircraft and missile defense and launch systems. Boeing shares currently trade with a dividend yield of 3.2 and a P/E ratio of 16.7.

Intelligence and Defense Systems
Raytheon Company (NYSE:RTN) provides a host of services to the intelligence and armed services community. The stock yields an annual 2.7% and trades with a 10.6 P/E ratio.

General Dynamics (NYSE:GD) is a manufacturer of aviation and combat vehicles and a variety of other weapons systems. The stock has nearly doubled since hitting 52-week lows back in March and still offers a dividend yield of 2.3%. It trades with a multiple of 10.5x last year's earnings and just 0.82x last year's sales.

The Wrap
There's more going for the defense industry than ongoing conflicts in the Middle East and Africa. The above-named companies have secure and transparent contracted earnings and top tier management - pay a reasonable dividend and sport some impressive fundamentals. (For more, see Guard Your Portfolio With Defensive Stocks.)

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By Aryeh Katz

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