Defense stocks have struggled in recent months. The worst might be behind them.
Morgan Stanley analyst Kristine Liwag upgraded Lockheed Martin shares to Buy from Hold late Sunday. Her price target rose to $835 from $690.
That's the highest target on the Street by almost $80, according to FactSet, and implies a gain of almost 40% from recent levels.
Lockheed stock was up 1.7% at $614.16 in premarket trading, while S&P 500 and Dow Jones Industrial Average futures were up 0.3% and 0.4%, respectively.
"Lockheed's announcement last week that it has a framework agreement with the DoW to maintain F-35 production at 156 per year takes significant risk out of the stock," wrote Liwag.
Lockheed announced a deal with the Pentagon ahead of its better-than-expected third-quarter earnings report on Thursday. The F-35 is one of the most successful fighter jet programs in history and accounts for an estimated 25% of Lockheed's total revenue.
In addition, Lockheed's missile ramp is "on-pace" and will drive "mid-teens" percentage growth in the missile and fire control business, Liwag added. What's more, "Lockheed's partnerships with newer defense tech players, including Hadrian, support faster production and demonstrate its ability to navigate industry disruption."
Investors have long worried that traditional defense players would lose market share to start-ups such as Hadrian and Andruil as the Pentagon shifts its focus to lower-cost systems that can be easily mass-produced.
"We view Lockheed's ability to deliver [expensive, highly-engineered] exquisite systems, while still acting flexibly to heed the DoW's call for speedy production, as supporting the company's ability to continue to grow across its portfolio," said Liwag.
Investors have worried about other things, too. Coming into Monday trading, the iShares Aerospace & Defense ETF was down 17% since the Iran war began in late February, trailing the S&P 500 by about 28 percentage points. Lockheed stock was down 8%. Northrop Grumman shares were down 24%.
Dropping amid rising geopolitical tensions has surprised some on the Street, but investors appear worried that military spending growth could slow if Democrats control Congress after the midterms.
The election has weighed on sector sentiment for months. Lockheed shares, however, rose 10% this past week after better-than-expected third-quarter earnings. Northrop stock gained 8%.
Maybe that's a sign that the tide is turning for Lockheed and the sector.
With the upgrade, 54% of analysts covering shares rate them Buy, according to FactSet. The average Buy-rating ratio for S&P 500 stocks typically ranges from 55% to 60%. The average analyst price target for Lockheed stock is about $647.
Liwag's new target values Lockheed stock at about 25 times estimated 2027 earnings. Historically, Lockheed has traded for about 17 times next year's estimated earnings.
Comments