With rising global tensions and geopolitical conflicts, the defense industry is gaining significant traction, driving robust demand for defense products. In addition, the growing upgrade activities and adoption of digital technologies are propelling the sector's development.

Given the industry’s robust outlook, it could be wise to invest in fundamentally strong air/defense stocks: Northrop Grumman Corporation (NOC), Textron Inc. (TXT), and Lockheed Martin Corporation (LMT). These companies seem well-positioned to capitalize on the growing opportunities in the sector.

With the increasing geo-political tensions such as the Russia-Ukraine conflict and the Israel-Hamas situation, governments worldwide are increasing their defense budgets to strengthen their military capabilities.

Concurrently, the U.S. Department of Defense (DOD) has allocated a $2.10 trillion budget for fiscal year 2024, with $1.08 trillion revolving around defense-related expenses. In parallel, with significant increases in F-35 and F-16 purchases, the U.S. Air Force is anticipating its annual foreign military sales to grow by 60% in the current year.

The Air Force foreign military sales service expects to book over $46 billion in weapon sales in fiscal 2024, up from $28.7 billion in fiscal 2023. The increased demand is largely driven by rising global instability, prompting U.S. allies to strengthen their defense capabilities.

Brig. Gen. Jeffrey Geraghty, Director of the Air Force Security Assistance and Cooperation Directorate (AFSAC), remarked, “Business is booming". He added, “Our partners recognize that it’s a dangerous world once again.”

The evolving focus on Artificial Intelligence (AI) is also transforming the air and defense industries. At a recent conference, officials highlighted the crucial need for allied and partner nations to leverage AI and advance the space domain, underscoring its role in addressing complex security challenges and enhancing industry prospects.

As the defense market worldwide expands due to growing investments and rising global tensions, the global defense market is projected to reach $772.49 billion by 2028, exhibiting a CAGR of 5.8%, according to a report published by The Business Research Company.

Considering these factors, let’s discuss the fundamentals of the three Air/Defense Services picks, beginning with #3.

Stock #3: Northrop Grumman Corporation (NOC)

NOC is an international aerospace and defense technology company. The company operates through four segments: Aeronautics Systems (AS); Defense Systems (DS); Mission Systems (MS); and Space Systems (SS).

For the fiscal 2024 second quarter, which ended on June 30, NOC’s total sales increased 6.7% year-over-year to $10.22 billion. Its total operating income rose 12.7% from the year-ago value to $1.09 billion.

Additionally, the company’s net earnings and EPS stood at $940 million and $6.36, respectively, up 15.8% and 19.1% year-over-year. Also, its free cash flow for the quarter increased 79.7% year-over-year to $1.11 billion.

NOC is raising its sales guidance for both AS and MS, with AS now projected to reach the high $11 billion range and MS expected in the mid-$11 billion range. These upward revisions are driven by the robust results achieved year-to-date and favorable expectations for the remainder of the year.

The company has also updated its margin expectations for AS and MS. NOC anticipates a margin rate for Aeronautics in the mid to high 9% range, reflecting its ability to maintain strong margins through a diverse mix of mature production programs and promising early-stage developments.

In addition, NOC has increased its sales guidance for DS to approximately $9 billion this year. This adjustment accounts for the realignment of the SDS division to DS, which is projected to contribute around $2.7 billion in sales. The increase also highlights NOC's forecast for higher sales volumes related to ammunition and weapons replenishment.

Overall, NOC’s impressive performance and positive outlook have led to an increase of $0.45 in its diluted EPS range, showcasing the company’s strong financial trajectory.

Street expects NOC’s revenue and EPS for the fiscal year ending December 2024 to increase 5.2% and 8.2% year-over-year to $41.34 billion and $25.20, respectively. Moreover, the company topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

Shares of NOC have gained 12% over the past six months and 22% over the past year to close the last trading session at $518.54.

NOC’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

NOC has a B grade for Momentum, Stability, and Sentiment. It is ranked #16 out of 71 stocks in the Air/Defense Services industry.

Click here to see the additional ratings for NOC (Growth, Value, and Quality).

Stock #2: Textron Inc. (TXT)

TXT, a diversified company spanning aerospace, defense, industrial, and finance sectors, utilizes its extensive global network to deliver a wide array of solutions and services to customers worldwide. Its segments include Textron Aviation; Bell; Textron Systems; Industrial; Textron eAviation; and Finance.

On August 21, Bell Textron Inc., a TXT company, delivered a Bell 429 and secured a purchase agreement for two Bell 407GXi aircraft for the Chicago Police Department. These models, renowned for their advanced technology and multi-mission capabilities, are perfectly suited for public safety agencies.

Bell's longstanding partnership with the Chicago Police Department, spanning over 20 years, underscores its leadership in the sector. This collaboration highlights TXT’s continued influence and potential for growth in the public safety aviation market.

On May 20, Textron Systems Corporation, a TXT company, and Kodiak Robotics, a pioneer in self-driving technology for trucking and defense, announced a groundbreaking collaboration to develop an autonomous military ground vehicle designed for driverless operations.

The partnership is set to advance the functionality, adaptability, reliability, and ruggedness of TXT’s systems, driving growth and solidifying its leadership in the military ground vehicle market. By integrating cutting-edge technology, TXT is poised to expand its capabilities and market reach, fueling its growth in the defense sector.

For the fiscal 2024 second quarter that ended June 29, 2024, TXT’s total revenues increased 3% year-over-year to $3.53 billion. The company’s adjusted income from continuing operations amounted to $296 million or $1.54 per share, with its EPS increasing 5.5% from the same period last year.

Analysts expect TXT’s revenues for the fiscal third quarter (ending September 2024) to increase 8.4% year-over-year to $3.62 billion. Meanwhile, its EPS is expected to grow 6.4% from the prior year’s quarter to $1.58. In addition, the company surpassed the consensus EPS estimates in three of the trailing four quarters.

Shares of TXT have gained 12.3% over the past nine months and 15% over the past year to close the last trading session at $86.93.

TXT’s sound fundamentals are mirrored in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.

TXT has an A grade for Value and a B for Momentum and Quality. It is ranked #7 out of 71 stocks within the same industry.

Click here to see TXT’s ratings for Growth, Stability, and Sentiment.

Stock #1: Lockheed Martin Corporation (LMT)

LMT is a global security and aerospace company specializing in the research, design, development, manufacturing, integration, and sustainment of advanced technology systems. Its operations are organized into four segments: Aeronautics; Missiles and Fire Control; Rotary and Mission Systems; and Space.

On September 10, LMT and Tata Advanced Systems Limited, a leading aerospace and defense solutions provider in India, announced a teaming agreement focused on the C-130J Super Hercules tactical airlifter. The collaboration aims to strengthen their business relationship and enhance operational capabilities.

The agreement underscores LMT’s dedication to supporting a self-reliant India and highlights the strong, confidence-building partnerships with Indian industry. By joining forces, both companies are set to advance their shared goals and contribute to the growth of the defense sector in India.

On August 15, LMT announced a definitive agreement to acquire Terran Orbital Corporation (LLAP), a prominent satellite manufacturer serving the aerospace and defense sectors, for approximately $450 million.

The strategic acquisition underscores LMT’s commitment to enhancing its advanced satellite manufacturing and responsive space capabilities, positioning the company for continued growth and innovation in the space industry.

LMT’s net sales increased 8.6% from the prior year’s quarter to $18.12 billion for the fiscal 2024 second quarter that ended June 30, 2024. Its consolidated operating profit grew marginally from the year-ago value to $2.15 billion.

Moreover, the company’s adjusted net earnings were $1.70 billion for the quarter. Its adjusted EPS of $7.11 reflects a growth of 5.6% from the prior year’s quarter. Plus, the company’s free cash flow increased 95.3% year-over-year to $1.51 billion.

The projected consensus for revenue and EPS stands at $17.63 billion and $6.63, respectively, marking a modest year-over-year increase of 2.5% in revenue and 4.7% in EPS for the fiscal 2025 first quarter ending March 2025. Furthermore, the company surpassed the consensus revenue and EPS estimates in all four trailing quarters.

Shares of LMT have gained 23.8% over the past three months and 36% over the past year to close the last trading session at $568.27.

LMT’s POWR Ratings reflect its strong outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

LMT has a B grade for Sentiment, Momentum, Stability, and Quality. It is ranked #2 among the 71 stocks in the Air/Defense Services industry.

Click here to access additional LMT ratings for Value and Growth.

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LMT shares were unchanged in premarket trading Friday. Year-to-date, LMT has gained 27.86%, versus a 18.37% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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