The White House Wants $773B to Fund Defense. Why Lockheed and Its Peers’ Stocks Are Struggling.
Defense stocks trade for about 18 times estimated 2022 earnings.
Jose Luis Magana / AFP)
Defense stocks are taking a small hit after details of the coming defense budget were released.
On Monday, the Biden administration disclosed it was asking Congress for $773 billion to fund defense for the government’s fiscal year 2023. That’s up about 4% compared with the 2022 request.
But the procurement number—which is used to buy equipment defense contractors make—is relatively flat year over year, points out Vertical Research Partners analyst Rob Stallard. In addition, the administration included a forecast out to fiscal year 2027 that shows spending growth, but at slower rates than in the past.
A basket of defense stocks, including Lockheed Martin (ticker: LMT) and Northrop Grumman (NOC), is down about 1.3% in early trading Tuesday. The S&P 500 and Dow Jones Industrial Average are up 0.4% and 0.6%, respectively.
For the week, the basket of defense stocks is off about 3%. The dip eats into some of the strong recent returns for the sector. Year to date, the basket is up about 15%, far better than the comparable drops of the broader market.
Defense stocks have been helped by the Russian-Ukraine conflict, as well as by low starting valuations. Large defense stocks traded for about 15 times estimated 2022 earnings per share at the start of 2022. Now they trade for about 18 times estimated 2022 earnings. The S&P 500 trades for about 20 times estimated earnings.
The White House’s proposal is only the initial request, however. UBS analyst Myles Walton pointed out in a Monday report that Republicans are pushing for more spending. Overall, he called the proposal in line with his expectations.
Walton also pointed out that nuclear and shipbuilding programs “came out on top.” The shipbuilding request is for $28 billion compared with $26.6 billion in fiscal year 2022. The request for the nuclear triad—which is the ability to launch nuclear weapons from land, sea, and air—was $15.9 billion for fiscal year 2023, up from $11 billion in 2022.
Those data points, in theory, help Huntington Ingalls Industries (HII) as well as Northrop, but their shares are performing in line with the group so far this week.
The most popular large defense stock on Wall Street remains Raytheon Technologies (RTX). More than 80% of analysts covering the company rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 58%.
The Buy-rating ratios for Lockheed, Northrop, Huntington, and General Dynamics
(GD) are about 36%, 47%, 31%, and 68%, respectively.
Write to Al Root at [email protected]
