August Stock Ideas

A potential scenario

A Trump presidency could be a tailwind to defense stocks. While nothing is certain, current polls give presidential nominee Trump about a 60% chance of winning the November election. If Trump prevails, defense spending is expected to rise. Historically, patterns of notable increases in defense budgets have coincided with Republican presidencies, particularly in 2001 and 2017. Despite significant increases in US defense spending dollars, it remains relatively low as a percentage of the GDP. However, under a Trump administration, defense spending could increase further and become a larger percentage of GDP. While funding for Ukraine might decrease, the reduction could be offset by other areas of military optimization.

U.S. defense spending 1990-2023

The ongoing standoff with resurgent Russia and China is likely to boost domestic and international sales for leading US military contractors. Many NATO countries are also expected to increase their military budgets to meet their fair share of GDP contributions. This year, 23 out of 32 NATO allies are on track to meet the alliance's target of spending 2% of their GDP on defense. This is a notable improvement from only 3 allies in 2014. According to a July 8 Wall Street Journal article: “A more ambitious 3% target would better reflect the world’s dangers after years of defense neglect across Europe. That ought to be a priority of Mark Rutte, the Dutch politician set to become NATO’s new secretary-general later this year.” 

To capitalize on these trends, top defense stocks RTX Corp (RTX), L3Harris Technologies (LHX), and Lockheed Martin (LMT) show strong potential for future outperformance.

RTX Corporation

RTX is well-positioned for significant growth due to rising defense budgets and strong support for innovation. With a diverse portfolio spanning defense and commercial aerospace and supported by robust R&D investments, RTX stands out in the industry. The company has consistently surpassed recent EPS estimates, indicating solid growth potential. The projected EPS for the next year is around $6, giving RTX a forward P/E ratio of approximately 17. This ratio could be lower if EPS estimates reach $6.50.

RTX Share Price and Quarterly EPS Actual vs. Estimate 

L3Harris Technologies

L3Harris distinguishes itself by providing mission-critical solutions to government and commercial clients worldwide. The company's involvement in major projects such as the $140 billion Sentinel ICBM program, a $32 billion backlog, and the F-35 program highlights its significance in the defense sector. L3Harris' strategic positioning and promising international pipeline, especially in Europe and with NATO allies, bolster sustained growth. With a favorable free cash flow outlook, a history of impressive stock buybacks, and plans to return 100% of excess cash to shareholders, LHX is also set for substantial shareholder value growth. Future estimates suggest double-digit EPS growth. With a forward P/E ratio below 17, the stock remains relatively affordable despite recent gains.

LHX Share Price and Quarterly EPS Actual vs. Estimate

Lockheed Martin

Lockheed Martin is renowned for supplying some of the most advanced and sought-after military hardware globally. The company’s recent 2Q24 earnings report demonstrated strong revenue growth, an impressive backlog, and progress in the F-35 program. Lockheed Martin’s increased guidance, stock buybacks, and commitment to R&D reflect renewed momentum and the potential for long-term gains. The stock’s valuation remains attractive, and with rising demand and fewer obstacles, Lockheed Martin is well-positioned for sustained growth, making it a strong pick for dividend growth.

LMT Share Price and Quarterly EPS Actual vs. Estimate 

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