At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best …
The best defense is a good offense, or so the saying goes. And so it was that HSBC opened a new front in the analyst wars yesterday, initiating coverage on a trio of new defense picks: General Dynamics (NYSE: GD ) to outperform, and Lockheed Martin (NYSE: LMT ) and BAE Systems to tie the market. Neutral ratings being a bit blah to write about, though, we'll be focusing today almost exclusively on the single limb that HSBC has clambered out on -- its "outperform" rating on General D.
So, will the stock truly outperform the market?
Survey says …
At first, the prognosis doesn't look good. I don't mean to be harsh here, folks, but HSBC's record in the Aerospace and Defense sector to date is simply … indefensible:
|
Companies
|
HSBC Said:
|
CAPS Rating
(out of 5)
|
HSBC's Picks Lagging S&P By:
|
|
Elbit Systems
|
Outperform
|
*****
|
35 points
|
|
Honeywell
|
Underperform
|
****
|
6 points
|
|
Boeing (NYSE: BA )
|
Underperform
|
***
|
30 points
|
Three picks made over the past 12 months, and three picks blown. Not a one of 'em is even close to beating the market. So right off the bat, we're off to a bad start. But perhaps HSBC's logic in making this latest upgrade will prove so clear and unassailable as to erase the doubts sown by its record?
Give us a clue, HSBC!
'Fraid not. Turns out, not a single major news outlet contains any details on HSBC's "buy" rating on General Dynamics. We know the upgrade happened, but we don't know why it happened.
But we can guess. First off, General Dynamics sells for less than 11 times trailing earnings, is expected to grow these earnings at better than 7% annually over the next five years, and pays a satisfying 2.5% dividend to its shareholders. Nor does it hurt to see that the company generates slightly more free cash flow than it reports as net income, suggesting the stock may be even a bit cheaper than it appears. Taken as a whole, these facts may lead us to conclude that the stock is at least fairly valued.
For the stock to become undervalued, however, we're really going to need faster growth than just 7%. But where is that growth going to come from? In recent days, General Dynamics has given us a few clues, in the form of:
- A $642 million contract, just awarded, to modernize the ground control system for NASA's tracking data and relay satellites.
- A General D-led consortium that received a $220 million research grant to develop robotic air and ground systems for the Army.
- The company's selection by Pink-Sheeted Laser Energetics to build the latter's Dazer Laser on contract.
Funny same, serious opportunity?
To my Foolish eye, it's that last point that looks most interesting -- the contract to manufacture Dazer Lasers. As you can probably guess from the funny name -- and its similarity in both rhyme and reason to TASER (Nasdaq: TASR ) -- the Dazer Laser is a laser … that dazes its victim. It's a flashlight on steroids, basically, that dazzles its subjects and renders them incapable of offensive action. The military and law enforcement are both potential markets.
This is, by the way, the first time I recall hearing of General D's direct involvement in the laser business, an industry heretofore dominated by the likes of Northrop Grumman (NYSE: NOC ) and Boeing, both of which are developing substantially more lethal directed energy weapons than the Dazer. But it's far from the first time the General has deigned to occupy the role of contract manufacturer. In years past, we've seen the General drafted to:
Foolish takeaway
Whether HSBC's right that General Dynamics will beat the market over the next 12 months -- I don't know. But contracts like the one just inked with Dazer Laser don't just give the General an opportunity to accelerate projected growth. They provide further evidence that this company remains a cornerstone of the defense and aerospace industries.
My advice: Bet on the General to beat the market at your discretion. But think twice before betting against it. General Dynamics is here to stay.
RSS Headlines
Fool UK