The defense industry enjoyed a relatively quiet earnings season compared to many sectors, with companies by and large reporting only minor issues due to the COVID-19 pandemic.
That could change in the months to come, especially if the pandemic response forces the U.S. government to divert resources away from defense spending and to other areas. But overall, defense companies appear to be a safe haven in a volatile world, with a reliable customer paying a large share of the bills and substantial demand for their products.
For investors interested in adding to their sector exposure, here are three defense stocks that are particularly worth buying right now.
Image source: Getty Images.
Lockheed Martin has a portfolio for all seasons
Lockheed Martin (LMT 0.01%) is the world's largest pure-play defense contractor, with a sprawling portfolio of aircraft, helicopters, missiles, and electronics that offers exposure to areas of vital importance to the Pentagon. The company is best known as the maker of the F-35 fighter, a potential trillion-dollar program that is just beginning to ramp up and should be a revenue producer for the remainder of the decade.
The F-35 has a massive supply chain and global production, which was impacted briefly earlier in the year by the pandemic. Further disruptions are possible, but Lockheed Martin investors can sleep tight knowing the company has a $144 billion backlog of orders including a range of missiles and missile defense systems.
Lockheed's THAAD system is the primary defense being deployed against missile threats from North Korea and elsewhere. Its Sikorsky helicopter unit is a finalist in two massive Army contract competitions worth a combined $60 billion. And the company's space and research labs are involved in a range of sensitive and critical Pentagon tasks, including in the area of hypersonics -- missiles that travel more than five times the speed of sound.
Lockheed Martin's share price is roughly flat year to date, which means it has outperformed the S&P 500 by about 10 percentage points. The stock is priced at 17 times earnings, in the mid-range for the defense sector, trailing Northrop Grumman but ahead of General Dynamics and the newly formed Raytheon Technologies.
Lockheed Martin's business was set up well to outperform for years to come even before COVID-19, and the pandemic has done nothing to change the company's long-term outlook.
Leidos is the biggest player in an important market
Government IT providers appear an attractive business for investors to take shelter in right now. The rapid expansion of the population of remote workers -- including government workers -- means the networks these companies maintain and the services they provide are even more vital. These companies are also more able to adapt their own operations to work-from-home conditions, lacking the large manufacturing facilities that more traditional defense contractors rely on.
Leidos Holdings (LDOS -0.48%) owns the largest government IT business, giving the company scale and pricing power that it can use to take business from smaller rivals. Leidos prior to the pandemic was also aggressively expanding into new businesses -- it announced two $1 billion-plus deals in the span of a few weeks to add to its advanced electronics and R&D capabilities, and to become a market leader in security screening hardware and services.
A demonstration of the Gremlins drone project. Gremlins was part of the portfolio of Dynetics, which was recently acquired by Leidos. Image source: Dynetics.
Its recent moves to grow its airport screening business now appear to have been ill-timed, and Leidos did report a choppy quarter that was impacted on many fronts by COVID-19. The company had to delay the rollout of a large hospital IT deal, and faces near-term uncertainty in some areas due to the pandemic, but Dynetics, its other recent acquisition, has already scored some defense wins and remains one of the most respected space and electronics research shops in the business.
Leidos shares are still up 4% year to date, but the stock is down 10% since Feb. 15. The next few quarters could be choppy, but Leidos is one of the most promising growth stocks in defense, with the potential to be much larger than its current $14 billion market capitalization a few years down the road. Take advantage by buying the COVID-dip today.
ManTech is ready for action
Staying on the government services theme, ManTech International (MANT) is an under-the-radar services company that has steadily evolved its business away from grittier tasks including handling military logistics and managing facilities in the Middle East, and toward tech.
The company today is a growth machine, generating 15% organic sales growth in the recently completed first quarter and posting an outstanding 1.8 book-to-bill ratio for the quarter. New business made up more than 90% of its first-quarter awards, giving the $2.9 billion market capitalization company a backlog of $9.3 billion at quarter's end.
ManTech also has one of the sector's best balance sheets, with just $26 million in net debt. The company in the past has been an active acquirer in a fragmented business, and I would expect to see further deals on the horizon to allow the company to expand its expertise.
On a late April call with investors, CFO Judy Bjornaas said ManTech remains focused on deals. "We anticipate M&A activity to increase as we recover from the pandemic," she said. "We are in an excellent position to review opportunities as they arise."
In the meantime, investors can enjoy a dividend yielding more than 1.7% at current prices. But over time, I'd expect ManTech to either put that pristine balance sheet to work to become a much larger company, or to be acquired at a premium to current share prices.
