Rising geopolitical instabilities around the world are creating positive prospects for U.S. Defense industry. The sector will also benefit from increased government spending on defense this year. Textron Holdings and Leidos Holdings are two defense stocks that I believe have a strong fundamental foundation. Continue reading.
In response to the ongoing conflict in Ukraine, and other concerns about global security, many countries are investing in new defense technologies and enhancing their military capability. The US defense industry is now a safe haven during uncertain market conditions.
I believe that investors should invest in Textron Inc. and Leidos Holdings, Inc., which are quality stocks, as they pay out stable dividends.
Aerospace and Defense is the largest sector in terms of manufacturing and infrastructure. As geopolitical tensions between the US and China and Russia increase, the US government has increased its defense spending. This is expected to boost R&D and manufacturing in the defense industry.
The United States Aerospace and Defense Market will grow at a 2.4% CAGR between 2023-2028.
The 2023 National Defense Authorization Act with its $858 Billion defense budget provides an opportunity for the US Defense Industry. The Act contains provisions to invest in technology, quantum computers, and artificial-intelligence programs.
The Act also authorizes $1 billion to be spent on the National Defense Stockpile, which is another way for the industry to obtain strategic materials.
The defense industry in the US, Europe, and Asia are also preparing to increase production rates in order to meet the growing demand for weapons, missiles, munitions and a variety of other items due to the rapid use in Ukraine, as well as the growth in international orders. Global defense spending is expected to reach $2.5 trillion in 2027.
Let's dig deep into the stocks listed above.
Textron Inc. (TXT)
TXT is involved in aerospace, defense and manufacturing. The company is divided into four segments: Textron Aviation, Bell, Textron Systems, Industrial and Finance. The company manufactures and sells commercial aircraft, military trainers and defense aircraft. The company also offers financing for both new and used aircraft, as well as bell helicopters.
Bell Textron Inc, a TXT company, announced on February 21, 2023 that the Bell 505 had completed its first flight using only 100% Sustainable Aviation Fuel. This was the first single-engine helicopter ever to use 100% SAF.
TXT announced a quarterly dividend on April 26 of $0.02 per common share, payable on July 1, 2023 to shareholders. At the current market value, its annual dividend yield is 0.12%. The average yield over the past four years is 0.16%.
TXT’s total revenue increased by 9.5% over the previous year to $3.02billion for the first fiscal quarter ending April 1, 2022. The Aviation segment revenue increased 10.5% over the previous quarter to $1.15billion and the Industrial segment revenue increased 11.2% to $932m.
The company's adjusted EPS grew 8.2% from last year to $1.05. Its net income adjusted for inflation grew by 2.8% to $218.2 million.
The consensus EPS of $1.21 is a 20.8% year-over-year increase. The revenue consensus estimate of $3.42billion for the current quarter represents an increase of 8.4% from the same period last year. The company's earnings surprises are impressive, having exceeded the consensus estimates for EPS in three out of four previous quarters.
The stock closed the last trading day at $66.65 after gaining 1.7% over the past nine-month period.
The POWR Ratings of TXT reflect this positive outlook. The stock's overall rating is A, which equates with a Strong Purchase in our POWR ratings system. The POWR ratings are calculated by weighing 118 factors to the optimal degree.
The company also received a B-grade for both Value and Quality. TXT ranks #8 in the Air/Defense Services Industry, which has 70 stocks.
Click here to view the POWR ratings for TXT.
Leidos Holdings, Inc. (LDOS)
LDOS, along with its subsidiaries, provides services and solutions to the United States as well as international markets for defense, intelligence and civil sectors. It is divided into three segments: Defense Solutions, Civil and Health.
On April 18, LDOS announced that its Dynetics Team would compete in a second moon race as part of a promotional partnership between NASCAR and a company well-known for its high speed.
Roger Krone, CEO of LDOS, said: "This groundbreaking partnership between Leidos NASCAR will take both companies to uncharted territories, just as we believe that our rover can do for NASA's astronauts.
On April 28, LDOS announced a cash quarterly dividend of $0.36 for each outstanding share of common stocks, payable June 30, 2023.
The company pays a dividend of $1.44 per year, which is equivalent to a yield 1.78% based on the current market price. The average yield over the past four years is 1.45%. Dividend payments increased at a CAGR 2.4% in the last three years.
LDOS revenues increased by 5.9% over the previous year to $3.70 Billion for the first fiscal quarter ending March 31, 2023. Its non-GAAP earnings were $205 million, or $1.47 a share. Adjusted EBITDA was $346 million.
All of the company's segments saw growth. Defense Solutions revenues increased 3% over the prior-year quarter, to $2.11 Billion. Civil segment revenues, at $877 Million, grew by 10%. The Health segment revenue increased by 9% to $710 millions.
Analysts predict that LDOS revenue will increase 3.5% over the previous year to $3.72 Billion in the second fiscal quarter ending June 2023. In the same quarter, analysts expect LDOS' EPS to rise 1.4% over last year to $1.61. It exceeded revenue estimates for each of the last four quarters.
The stock closed the last trading day at $80.89, a slight intraday gain.
It's no surprise that LDOS is rated B, which is equivalent to a Buy on our proprietary rating scale.
The stock also has a grade of B for value. It is ranked #20 among 79 stocks in the Technology-Services industry.
Click here to access POWR ratings for growth, momentum, stability, sentiment, and quality for LDOS.
TXT shares traded at $64.89 on Thursday morning. This is down $1.76 (-2.64%). TXT shares have fallen -8.32% year-to-date compared to the benchmark S&P 500 index which has risen 6.32%.
About the Author: Kritika Saarmah
Kritika's passion for writing and interest in risky financial instruments made her an analyst and journalist. She has a bachelor's in commerce, and is currently studying for the CFA. She hopes to identify investment opportunities that are not being explored by investors using her fundamental approach.