The recent approval of a $95 billion military aid bill for Ukraine, Israel, and Taiwan combined with anticipated increases in global defense spending amid geopolitical tensions has turned investors’ attention towards promising defense stocks.
With the White House and Congress currently deliberating over the fiscal year 2025 defense budget, which some predict could reach upwards of $900 billion, we’re seeing a shift in Pentagon priorities. This includes a focus on missile development, like the PrSM to supersede the ATACM and LRASM, both spearheaded by Lockheed Martin (NYSE:LMT). Interestingly, budgetary constraints could lead to fewer F-35 orders, despite foreign interest, impacting defense stock performance.
In the past, significant defense spending hikes in Europe led to European defense stocks thriving. However, despite these gains, their performance has been lackluster lately, leading to speculation that defense stocks may be overvalued. Further exacerbating this is the recent struggles of larger U.S. firms like Boeing (NYSE:BA) with unrelated aircraft construction quality issues.
Given this uncertainty, lesser-known defense stocks that cater to varied, emerging challenges might have a competitive edge.
Booz Allen Hamilton (NYSE:BAH)
Booz Allen Hamilton (NYSE:BAH), a company that offers engineering, analytics consulting, and digital solutions for mission operations, is one such defense stock. While not an obvious choice for investors seeking direct exposure, the company’s focus on cybersecurity, a priority area as both civilian and military networks intensify their defenses, positions it favorably.
“A 10% boost in cybersecurity outlays” proposed by the White House for the coming financial year could open up opportunities for such defense stocks. In April, Booz Allen partnered with Cloudflare (NYSE:NET) to provide immediate cybersecurity threat response to organizations battling DDoS and ransomware attacks, further strengthening its case. Notably, analyst coverage on Booz Allen remains positive, with strong encouragements to maintain or build a position targeting a 12-month price of $156.61 per share.
Huntington Ingalls (NYSE:HII)
For those looking to invest directly in the defense sector, Huntington Ingalls (NYSE:HII), the leading U.S. military shipbuilder and primary builder of American nuclear-powered aircraft carriers, presents an attractive opportunity. These carriers, crucial for power projection in strategically significant locations like the Red Sea, remain a priority even amid debates over other defense initiatives. HII also has contracts to manufacture new Columbia-class ballistic missile submarines set to replace the Ohio-class vessels in the next decade.
The stock trades at a relatively modest P/E ratio of 16.1x, below the S&P 500 index’s current P/E ratio of 27.2x, making it an affordable choice for defense stock investors. Coupled with impressive quarterly results and a consistent dividend yield of 1.89%, HII presents a compelling argument.
Howmet Aerospace (NYSE:HWM)
Howmet Aerospace (NYSE:HWM) might not be a familiar name to those scouting defense stocks. The company specializes in manufacturing high-precision aircraft components, including jet engines and forged aircraft wheels, and offers metal management consulting services for defense sector clients.
Analysts remain positive on this under-the-radar defender, especially given the potential for increased orders for commercial aircraft and greater military aircraft utilization, leading to more regular parts replacements. Over the past five years, Howmet has consistently achieved an EPS growth of 24%. Its shareholders have also benefited from an overall return of 70% over the past year, with a consensus price target of $73 per share, indicating a substantial upside from current levels.
While the author does not hold any positions in the securities mentioned at the time of publication, and while the opinions expressed are subject to guidelines and may change, the information provided is as accurate as possible at time of release.
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