A Lockheed Martin F-35 Lightning II jet fighter. Shares of the defense company have climbed 14% so far this year.
Photograph by Fabrice Coffrini/AFP/Getty Images
Lockheed Martin and other defense stocks jumped Monday after Germany announced plans to bolster its military strength, sinking €100 billion ($111 billion) into a fund.
The current conflict, however, isn’t changing many views on Wall Street. Analyst appear to favor what they like coming into 2022, before war broke out in Europe.
Lockheed Martin (ticker: LMT) stock is up 2.5% in early trading, General Dynamics (GD) stock is up 1.3%, Northrop Grumman (NOC) stock is up 1.7%, and Raytheon Technologies (RTX) stock is up 0.8%. The S&P 500 and Dow Jones Industrial Average are off 1.1% and 1.3%, respectively.
The stocks are reacting to comments made by German chancellor, Olaf Scholz, on Sunday in an emergency session of the Bundestag following Russia’s attack on Ukraine.
He said Germany would almost double its military spending, and buy fighter planes made in the U.S. for the first time in decades, according to The Wall Street Journal. It quoted him saying: “Putin wants to establish a Russian empire,” and it quotes Scholz posing a question of “whether we can summon the strength to set boundaries to warmongers like Putin.”
The fund will be set up immediately, and Scholz said defense spending would be ramped up in coming years to above 2% of GDP, an increase from 1.5%.
Monday’s reaction to the news isn’t surprising. Vertical Research Partners analyst Rob Stallard wrote back in January that defense stock investors would take a “shoot first/ask questions later approach if the situation in Ukraine deteriorates.”
Back then he laid out three scenarios for Russia-Ukraine. Invasion was his third, most severe, outcome. “We’re in scenario three,” he told Barron’s Friday. And investors have reacted accordingly. Pure-play defense stocks jumped last week too. Share rose about 6% on average last week, more than 5 percentage points better than the change of the S&P 500.
Stallard, however, doesn’t see the current conflict changing the path of U.S. defense spending, which is key for defense stock revenue. Still, he believed defense stocks looked relatively attractive coming into the year. His top idea remains L3Harris Technologies (LHX). Stallard also has Buy ratings on General Dynamics, Lockheed Martin, and Raytheon Technologies.
The conflict, and German announcement, should boost revenue potential, but only a little. Truist analyst Michael Ciarmoli estimated Monday that higher spending could boost NATO nation’s military spending by about 11%. That amounts to an additional $5 billion to $10 billion a year. Total sales at pure-play U.S. defense companies, for context, amounts to roughly $170 billion a year.
Stock performance isn’t all about sales, however. There is the impact on investor perception to consider. UBS analyst Myles Walton raised his price target on defense stock under his coverage Monday by about 8% or 9%. He is using a higher valuation multiple. That’s a bigger bump than a potential sales boost from Ciarmoli’s NATO spending estimate, but Walton’s bump is nearly identical to what’s happened to defense stocks since conflict broke out.
Investors may just want to stick with their favorite defense names coming into the year. Wall Street’s favorite defense stocks are L3Harris, Raytheon, and General Dynamics, based on analyst bullishness. The Buy-rating ratio for L3Harris stock is 68%. The average Buy-rating ratio for a stock in the S&P 500 is about 58%. General Dynamic (GD) and Raytheon Technologies (RTX) have Buy-rating ratios of 68% and 81%, respectively.
Those are the three most-favored large capitalization U.S. defense names on the Street.
Corrections & amplifications: Germany said it plans to boost its military spending by €100 billion, or $111 billion. A previous version of this article incorrectly said the conversion was equal to $111 million.
Write to Rupert Steiner at [email protected]
