With all the recent posturing in Washington over the federal deficit, one thing seems certain: Federal spending will probably slow, to one degree or another. However, investors in certain government-reliant segments have long anticipated this budgetary blitzkrieg, evacuating those industries and firms they deem most vulnerable.
Enter the defense industry. You could argue that no other industry has spent more time in skittish investors' crosshairs. The budget hoopla and the beginning of the end of two wars abroad have convinced the market that these companies are due for a shelling in their own right. However, as I've argued on several occasions, I think investors might have significantly overreacted to how soon those problems will come home to roost. Given how cheap some stocks in this sector currently appear, I enlisted some of our foremost defense analysts to pitch their best stock ideas.
Rich Smith, Motley Fool contributor
My favorite defense stock has gotta be Lockheed Martin
Last year, I nominated Lockheed as one of the 10 "core" stocks that deserve a place in any investor's long-term portfolio. While Wall Street worries about how budget cuts will affect the defense industry, Lockheed to me looks like one of the few companies that will fly through the turbulence unharmed.
Over the next several decades, the U.S. Army, Navy, Air Force, and Marines will phase out their multiple ground-attack and air superiority fighter jets in favor of a single common combat plane: The Lockheed Martin F-35 Lightning II. Lockheed beat out Boeing
This budding military monopolist costs less than 10 times earnings, is growing profits at better than 9% per year, and pays shareholders a 3.7% annual dividend. I think it's a bargain. (Oh, and Lockheed reports earnings on Tuesday -- so if you're interested in it, you can get even more up-to-date info on Lockheed in just a few days. Add Lockheed to your watchlist and catch the news first.)
Katie Spence, Motley Fool contributor
Admittedly, Northrop Grumman
Since 2010, Northrop's sales increased from $33.8 billion to $34.8 billion. Earnings per share from continuing operations increased 39%. And the company raised its quarterly dividend in May by 9.3%. That's Northrop's seventh consecutive annual increase, and with a payout ratio of 26%, it's completely sustainable.
Thanks to strong cash flow, Northrop Grumman also repurchased 19.7 million shares. That not only signals management's faith in the company's continued growth, but also raises the value of each share by assigning it a greater slice of the company's earnings.
Want more reasons to buy now? Currently, Northrop Grumman's P/E is 9.21. When you compare that to Boeing's P/E of 15.75, Northrop Grumman looks like a sweet deal.
As if that weren't enough to seal the deal, remember that management I mentioned? Wesley Bush, Northrop Grumman's new CEO as of 2010, brings to the table more than 25 years of aerospace and defense experience. Moreover, Bush has placed a strong emphasis on creating value for investors. That may look a little self-serving when you consider that Mr. Bush owns a large chunk of shares himself. But when you also consider that creating value for investors means growing the business, suddenly that self-serving attitude seems pretty appealing to outside investors.
Andrew Tonner, Motley Fool editor and contributor
For my selection, I moved slightly down the market-cap scale to the smaller, but still relevant L-3 Communications
L-3 has a history of solid past performance to support its case as a well-run contractor, generating consistently respectable returns on equity and operating margins. It has a safe balance sheet with a debt-to-equity ratio of only 60%. It has a history of consistently paying out and growing its dividends.
However, L-3 becomes more compelling when you start examining the multiples for which it currently sells: 10 times earnings over the past 12 months, 9.4 times next year's expected earnings, and 7.1 times its last 12 months' cash flow.
Consider that competitors Textron
Katie Spence owns shares of Lockheed Martin. Andrew Tonner and Rich Smith own no position in any of the companies mentioned in this article. The Motley Fool owns shares of Textron, L-3 Communications, Northrop Grumman, and Lockheed Martin. Motley Fool newsletter services have recommended buying shares of L-3 Communications. 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.