As defense spending being a sizable portion of the federal budget is the reason many investors love defense stocks. In 2024, the country will spend approximately $842 billion on our national defense. That’s a 3.4% increase from the amount it will spend in 2023.
Companies that serve as contractors for the defense industry generally deliver stable revenue that leads to earnings growth. As seasoned investors know, earnings growth is the single best predictor of stock price growth.
For many investors, big names with massive market caps are what comes to mind when hearing about defense stocks. However, you can find some hidden gem, undervalued defense stocks in mid-cap and small-cap companies. Today we will discuss one large-cap, one mid-cap and one small-cap defense stock option that offer good opportunities in the defense sector.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) is a large-cap, blue-chip stock synonymous with the defense industry. The company provides products and services for all military branches, whether land, sea, air or even space. Specifically, Lockheed Martin accounts for 28% of defense contract spending.
As a premier defense contractor, Lockheed Martin has a solid backlog of projects that offer investors predictable, stable revenue and earnings. In the first three quarters of 2022, revenue was lower year-over-year (YoY). However, that changed in the fourth quarter, and Lockheed Martin has now notched three consecutive quarters of YoY revenue growth.
Yet, despite its lofty market cap and share price of over $400 a share, LMT stock is an undervalued defense stock at just 16x earnings. Earnings are expected to grow by 4% next year and analysts are taking notice. The stock still has a consensus “Hold” rating. But it also has six strong buy ratings with a $550 price target from Susquehanna.
AAR Corp. (AIR)
As its name suggests, AAR Corp. (NYSE:AIR) manufactures products and provides services to various aviation customers, including defense markets. It’s a small company with a market cap of just over $2 billion. That aligns with the company’s revenue over the last four quarters which has come in at around $1.99 billion.
However, in the 2024 budget, the U.S. intends to spend $61 billion to “sustain air dominance.” In late 2022, AAR announced an extension of its partnership with Leach International Corp. This ensures that AAR will be in line to get a slice of that $61 billion pie.
With a forward P/E ratio of just 17x earnings, the company has an attractive valuation. Analysts do not heavily cover it, but AIR stock does have a consensus buy rating with a consensus price target that suggests about 4% growth.
Huntington Ingalls Industries (HII)
The 2024 U.S. defense budget includes more than $48 billion for sea power. This category includes funds to build nine battle force ships. Huntington Ingalls generated $10.68 billion in revenue in 2022. In 2023, it’s on pace to beat that number with the company forecasting $8.4 to $8.6 billion to come from shipbuilding.
Plus, analysts are projecting a 14% increase in earnings. Investors are only paying 15x forward earnings for shares of HII stock. However, that growth may not be showing up yet in the company’s stock which is down 2.79% in 2023 and just under 4% (3.98%) in the last 12 months.
Five of the 12 analysts that have issued ratings in the last 12 months give the mid-cap stock a “Hold” rating. However, the stock also has five buy ratings including four strong buy ratings. Since the company’s earnings report, JPMorgan Chase (NYSE:JPM) boosted its price target to $250 and the highest price target for HII stock is $300.
While investors wait for that growth, they can collect a respectable dividend with a payout of 2.21%. The company has increased the dividend for 11 consecutive years.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.