In Defense of 3 Companies You Might Be Overlooking

As a former active duty Air Force member, defense companies naturally peak my interest. After all, I used their equipment, I know what works and what doesn't, and I've worked alongside many a defense company employee. And though they're not as glamorous as say, a tech company, these three companies bring in considerable amounts of revenue, which should spell cha-ching to investors!

The behemoth
Massive: That is the only way to describe Boeing (NYSE: BA  ) . In February, it won a $35 billion contract to build 179 KC-46A tankers. This is considered to be one of the biggest contracts in history, and it sets Boeing up as a leader in defense contracting. Add to that over $320 billion in backlog (contracts and sales awarded waiting to be filled), and you have a company that looks like a solid investment. But before you jump in with both feet, consider these two things:

  1. The first 18 planes are due to be delivered by 2017. That may seem like a small number, but in the defense world, 18 planes by 2017 is a mammoth task.
  2. This is a fixed-priced contract. In the past, Boeing has been granted extensions and additional government funding if the contract runs over budget. With a fixed-price contract, that is not an option. As such, if Boeing's price quote is off, the government could:
    1.  Sue them for breach of contract.
    2. Force them to take the added expense out of their profits.
    3. Cancel the contract (very unlikely though).

A Foolish investor should keep those things in mind before investing in Boeing. But, if Boeing is able to deliver as promised, the sky's the limit for this defense giant.

Boeing

2010

2009

2008

Backlog*

$321,826

$315,558

$351,926

Revenues*

$64,306

$68,281

$60,909

Dividends Per Share

$1.68

$1.68

$1.62

*Numbers in millions.

The investor-focused
Sure, it's not as big as Boeing, but Northrop Grumman (NYSE: NOC  ) definitely has a lot to offer investors! Its' EPS estimate for December 2012 is 7.14, compared with Boeing's 5.27. Moreover, Northrop Grumman has accelerated its share repurchase and has reduced its' share count by 5%. This says two things to investors:

  1. The company believes in itself.
  2. Earnings will be divided by fewer outstanding shares, which raises the value of each share.

Northrop Grumman

2010

2009

2008

Backlog*

$64,183

$69,186

$76,415

Sales & Service Revenues*

$34,757

$33,755

$32,315

Dividends Per Share

$1.84

$1.69

$1.57

*Numbers in millions.

The small(er), but impressive, total package
With approximately 90,000 employees, General Dynamics (NYSE: GD  ) is smaller than its competitors (Boeing: 160,500; Northrop: 117,100), but that doesn't slow this company down in the least! Since 2006, General Dynamics has admittedly lacked billion dollar contracts with private companies, and that has hampered its annual growth. Recently, however, General Dynamics announced that it's been awarded a $1.2 billion contract to construct two SSN-787 submarines per year on the U.S. Navy's Virginia-class program. Add to that a healthy backlog and a company with a reputation for delivering as promised, and you've got a defense company that is poised to offer its investors great returns.

General Dynamics

2010

2009

2008

Backlog*

$59,561.00

$65,545.00

$74,127

Sales & Service Revenues*

$32,466

$31,981

$29,300

Dividends Per Share

$1.68

$1.52

$1.40

*Numbers in millions.

The deal on defense
Defense companies may not be the most glamorous companies to invest in -- a tank is no white iPhone, for example -- but if you think about it, they may be some of the best: With the security of America depending on what these companies bring to the table, it's unlikely they'll disappear into the sunset any time soon.

What do you think? Want to watch Boeing, Northrop Grumman, and General Dynamics in action? Click on their links to add them to your watchlist.

Fool contributor Katie Spence is flying high in her airplane. She owns shares of Northrop Grumman.

The Fool owns shares of General Dynamics and Northrop Grumman. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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