Global Conflicts Impact Defence Stocks

Lockheed Martin (LMT) shares rose 1.5% following the release of its Q1 earnings on Tuesday, April 18, as its results exceeded market forecasts due to strong demand for the company’s products and services. Analysts were expecting earnings of $6.07 per share, but the company reported an almost 8% higher profitability at $6.61 per share. Sales were also above the expected $15.05B at $15.1B. 

The main driver for the outperformance was seen as a 16% increase in sales at its Space unit compared to the prior year. The company also said it is now expecting earnings of $26.60-26.90 FY EPS on $65-66B in revenue, reaffirming its yearly guidance given back in January fully. Lockheed Martin returned $1.28B to shareholders, including $500M as part of its current share repurchase program. Overall, analysts concluded that, despite the earnings beat, Lockheed's report was seen broadly in line.

Aside from the positive earnings report, the US State Department approved a potential sale of high mobility artillery rocket system (HIMARS) launchers and Army Tactical Missile System (ATACMS) missiles among other long-range missiles and ammunition to Poland in a deal valued at up to $10B. Poland has been modernising its military and plans to donate older weapons to Ukraine to fight against Russia's invasion. Interestingly, the missile defence systems involved in the potential sale are manufactured by Lockheed Martin. (Source:Reuters)

Defence Stocks in a Trend

US defence companies are seeing an improving scenario following Russia's invasion of Ukraine. Particularly defence companies that produce missiles, surveillance technology, and military satellites. Estimates suggest that Europe could increase defence spending by as much as 66% over the next three to four years and reach up to €488B. Analysis by Bain & Co shows that NATO could increase defence budgets by $50-75B a year going forward as a direct result of the war. 

In 2022, global defence spending increased at the fastest rate in over 15 years, growing at 8.6% annually, driven by increasing tensions and conflicts worldwide. Eastern Europe saw the largest increase in spending. US defence spending is expected to increase on average by 7% over the next seven years, more than twice the rate seen since 2014.

US defence spending is expected to exceed $1.0T by 2026, creating substantial opportunities for defence companies. These kinds of stocks tend to be more attractive during periods of economic uncertainty because they generally have predictable, long-term government contracts.

Companies to Watch

Raytheon (RTX) is a leading defence company with a specialisation in aerospace and provides space-based solutions for both government and private customers worldwide. It will report its Q1 earnings on Tuesday, April 25. Recently, one of its units was awarded a contract to provide microsatellites for NASA's jet Propulsion laboratory to study climate and weather models. Raytheon co-manufactures Javelin missiles with Lockheed Martin, which have reached legendary status for their ubiquitous use in Ukraine. 

Analysts believe that Raytheon shares are set for a rebound, as they expect the company to affirm its free cash flow targets for the coming years. Wolfe Research set a price target of $117 for the share, expecting a potential of around 17% appreciation and its long-term growth prospects to remain favourable.

Northrop Grumman (NOC) will report earnings on April 27, and the consensus is that it will report a 4.75% quarterly increase in sales to $9.2B. The company also has a large space portfolio, as well as being closely tied to the nuclear triad. Northrop Grumman has gained 5.32% over the past month, outpacing the Aerospace sector's gain of 1.76%, while the full-year Zacks Consensus Estimates are projecting earnings of $22.04 per share and revenue of $38.28bn. Last quarter, the company handily beat sales estimates and grew by 16% compared to the prior year. NOC is expected to have earnings of $5.19 per share for the first quarter of 2023. The forecast is based on an average of nine analysts' predictions and $0.01 above last quarter. 

Conclusion

Lockheed Martin shares moved higher following its earnings report, beating estimates at the top and bottom lines. The aerospace and defence company is one of the major suppliers of missiles and other military equipment in Ukraine. The conflict is seen boosting defence spending in the coming years and creating more opportunities for US defence firms. Will RTX and NOC deliver send a similar message to Lockheed?