Al Root
Investors are wondering what is next for defense stocks after a swift two-day decline triggered by President-elect Donald Trump's initial efforts to prepare a new team to defend the nation. Citi analyst Jason Gursky says the pain likely isn't over.
Defense shares have been weak since Trump's Tuesday nomination of Pete Hegseth to serve as the next defense secretary. That new was followed by a Reuters report that the new administration is planning significant turnover at the Defense Department.
Other security-related appointments included Marco Rubio as secretary of state, Kristi Noem as homeland security secretary, and Michael Waltz as national security advisor.
Adding to fears is the newly created Department of Government Efficiency, headed by Tesla CEO Elon Musk and Roivant Sciences founder Vivek Ramaswamy. They are tasked with reducing wasteful government spending, but no one knows how that will impact the defense sector.
Given that enormous helping of uncertainty, shares of large defense contractors Lockheed Martin, General Dynamics, Northrop Grumman, and L3Harris Technologies fell 5.5% on average between Tuesday and Thursday. The iShares Aerospace & Defense ETF fell 1.9%.
Boeing is a large defense contractor, but the company's problems in commercial aerospace have already slammed that stock. Coming into Friday trading, Boeing stock was down about 47% year to date and 69% from all-time highs reached in March 2019.
Gursky says defense contractors' price-to-earnings ratios could fall another 18% as investors look back to how the sector performed in past eras of reduced spending. "The period 2010 to 2013 is likely the timeframe most investors will look to given that budgets were under pressure as the wars in Iraq and Afghanistan wound down and the Budget Control Act capped spending during that era," wrote Gursky on Friday.
Lockheed, Northrop, General Dynamics, and L3Harris trade for an average of 18.2 times estimated 2025 earnings. A decline of 18% implies the average could hit 14.9 times.
That sounds like a risk, but Gursky has a silver lining. "We are skeptical that DOGE will have a profound impact on defense spending given the geopolitical environment and Congressional support."
Gursky rates Lockheed, General Dynamics, and L3Harris shares at Buy. He rates Northrop shares at Hold.
His price targets for Lockheed, GD, and L3Harris are $700, $354, and $291, respectively. His price target for Northrop is $587 a share.
Lockheed stock closed at $538.99 on Thursday. Northrop, GD, and L3Harris ended the day at $500.34, $292.42, and $248.16, respectively
General Dynamics and L3Harris are the most popular on Wall Street, with 63% of analysts covering the stocks rating share Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. For Lockheed and Northrop, 46% and 37% of analysts, respectively, rate shares Buy.
Write to Al Root at allen.root@dowjones.com
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(END) Dow Jones Newswires
November 15, 2024 08:52 ET (13:52 GMT)
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