Best 5 Defense Stocks to Trade in 2022
The war in Ukraine has led to calls for more defense spending in most western capitals like Germany, the UK, and other countries. Many NATO members have vowed to increase their spending to about 2% of their GDP.
All these events will lead to more income for some of the biggest defense companies, which explains why the iShares Aerospace and Defense ETF (ITA) has outperformed the S&P 500 index. So, in this article, we will look at the best defense stocks for investing in 2022.
Raytheon Technologies is one of the biggest companies in the defense industry globally. It is valued at over $149 billion while generating over $64 billion every year. In addition to its eponymous Raytheon unit, it also owns other companies like Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space, and its missiles and defense business.
In 2021, Collins had $18.5 billion in sales while Pratt & Whitney brought in $18.2 billion. In the same period, its intelligence and space and missiles, and defense had $15.2 billion and $15.5 billion, respectively. About 48% of its sales go to the US government, with the rest going to other countries.
Raytheon is a good defense stock because of how diversified it is and the fact that it will benefit directly as more governments boost their spending. Further, the company has a strong and highly sustainable dividend. The RTX stock price also has a long track record of outperforming the S&P 500 index.
Textron is a leading company in defense, civil aviation, and other industrial areas. It is valued at over $16 billion and makes $12 billion in annual revenue. The firm’s business is divided into five key segments, including Bell, Aviation, Industrial, Systems, and Financial.
Bell and Industrial are its two biggest businesses as they account for over 52% of total revenue. Its sales to the government are about 27% of total revenue. Bell manufactures military helicopters and provides parts and other services to the industry. Similarly, its systems business manufacturers several products for the military like unmanned aircraft systems and landing aircraft cushions.
With defense spending on an upward trend, Textron will benefit since governments are expected to increase their budgets for drones and other equipment. While Textron has beaten the S&P 500 index for a long time, its stock is still cheap, trading at a forward PE of 18.
Lockheed Martin is one of the best-known defense stocks in the US. The company has a market cap of $121 billion, making it the second-biggest firm in the sector. It is a conglomerate that has acquired several businesses in the past few years.
Lockheed’s business is divided into several segments, including Aeronautics, missiles and fire control, rotary and mission systems, and space products. One of its best-known products is the F-35 fighter jet which costs about $82 million.
Lockheed products are used widely by the American military. And during the Ukraine crisis, countries like Germany announced that they would spend more money on acquiring some of its products like the F-35 jet.
Lockheed is a good investment because of its large backlog and the fact that it has a stable and growing business. Its stock is also a bit undervalued, considering that it has a forward PE ratio of 16.65, which is lower than that of the S&P 500 index. The firm also has a steady and secure dividend.
Transdigm Group is one of the biggest industrial companies in the US. Unlike the other firms mentioned, it does not manufacture weapons directly. Instead, the company creates high-engineered products that are used by most firms in the industry. It operates in three segments: power and control, airframe, and non-aviation business.
Transdigm is a real conglomerate that operates tens of companies like Hartwell Corporation, Palomar, Mason Controls, and CDA Intercorp. The fact that it uses a conglomerate model partially explains why its stock has underperformed the S&P 500 index in the past few years. Investors have basically been moving away from conglomerates to companies that are laser-focused on specific products.
Transdigm is a good investment because its products will likely keep doing well in the coming years as countries boost their spending. It is also an undervalued company.
General Dynamics is a leading defense and industrial company valued at over $66 billion. The company operates in three key industries: aerospace, marine systems, systems and technologies, and combat systems.
General Dynamics has helped to build some of the best-known products in the American military. For example, it is building the expeditionary sea base ship at the cost of $500 million. It is also building the John Lewis, Arleigh Burke, and Columbia submarines. In total, it has a backlog worth tens of billions of dollars.
Meanwhile, the company is also well-known for its tanks which include Abrams, Stryker, AJAX, Pandur, and Duro. These tanks have become extremely popular among many militaries because of their effectiveness.
General Dynamics business has been in a strong growth trend in the past few years. Its revenue jumped from $37 billion in 2020 to over $38 billion, while its operating margin has remained steady at about 10.2%. The stock has also outperformed the S&P 500 even as it remains relatively undervalued. It also has an attractive dividend, and the management is actively buying back its stock.
The defense industry is expected to see more growth in the coming years. Indeed, most governments like the United States and in the eurozone are boosting their spending. Therefore, these five stocks will likely keep rising in the coming years. Other companies to watch are Heico, Howmet Aerospace, and Huntington Ingalls.
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