As we head into 2024, the world is filled with geopolitical unrest. Your first thought may be, “What’s new?” But, what’s striking about the currently evolving conflict landscape is the level of nation state conflict, as opposed to the past few decades that almost exclusively saw nation states battling with non-nation state terrorist groups.
This blooming threat environment means a scale shift in the types of weapons, and weapon systems, that must now be purchased by global actors. And that means companies like Huntington Ingalls (HII), BAE Systems (BAESY), and Lockheed Martin (LMT) are likely in for outsized returns as the large ship, aircraft, and weapons system cycle is refreshed.
When it comes to building and maintaining large platforms, it doesn’t get any larger than the aircraft carriers and nuclear submarines that are the pride and joy of Huntington Ingalls (HII). Huntington Ingalls is the largest manufacturing employer in Mississippi, with its Pascagoula shipyard, and also has a major shipbuilding operation in Newport News, Virginia.
HII not only builds and maintains aircraft carriers, destroyers, amphibious assault ships, guided missile destroyers, and submarines, but also has what it calls a Mission Technologies division. Mission Technologies manufactures everything from unmanned undersea vehicles (UUVs) to critical missile system software, and provides support, technical, and engineering capabilities to a number of defense and defense related government agencies.
And, there is no lack of work to be done. In its latest quarter Huntington Ingalls reported a backlog of $49 billion, with $5.4 billion of contract wins announced in the latest quarter alone. The company has recently landed major contracts from the Navy, Marine Corps, Air Force, and Coast Guard, as well as the NGA (National Geospatial Agency) and the Missile Defense Agency.
The company is paying down debt at a brisk pace, and expects to reach a target of less than 2x debt to EBITDA by the end of 2024. HII plans to return all of its free cash flow to shareholders, after debt servicing, in its 2023-’24 fiscal year through share repurchases and dividends. It currently has a 2.2% dividend yield, and trades at only 0.87 times sales.
Huntington Ingalls is rated an overall A in our POWR Ratings, above 97.7% of the stocks we track in our database. Its highest component scores are in the areas of Value, Momentum, and Growth.
As opposed to enumerating what they do, there isn’t a lot that BAE Systems (BAESY) does not do in the defense industry. From designing and building submarines, to teaming on the F-35 strike fighter, to advanced electronic warfare, BAE does it all.
The company, headquartered in London, employs more than 93,000 people in over 40 countries, including a large number in the U.S. where around 44% of sales are made. As a global player, BAE will benefit from increasing defense budgets in Europe (13% of sales), the UK (20% of sales), and the Middle East (17% of sales).
In its latest quarter BAE reported a record order backlog, a 20% increase in operating profit, and a 62% increase in earnings per share. The company currently trades at a PE of just under 18, at only 1.27 times sales, and pays a 2.5% dividend. The company also said it had bought back over $500 million of its stock in the first half of 2023, and that it had approved a further buyback of $1.88 billion over the next three years.
BAESY has an A rated stock in our POWR Ratings, coming in over 95% of the stocks that we track. It’s particularly strong in the Stability component, where it tops 97.9% of our stocks.
Finally, as conflicts around the world either escalate and continue to evolve, the global juggernaut many nations will look to for strategic defense systems is Bethesda, Maryland based Lockheed Martin (LMT). Just last month the company reported a backlog of $156 billion, and that “both domestic and international orders were strong.”
LMT, lead contractor for the previously mentioned F-35 Strike Fighter, as well as manufacturer of air-to-air missiles, space systems, and Intercontinental ballistic missiles (ICBMs), reported free cash flow of $2.5 billion in its latest quarter, and that the entire $2.5 billion had been returned to shareholders via dividends and share repurchases.
Lockheed also reported its share repurchase authorization had been increased by $6 billion to $13 billion. The company increased its quarterly dividend, and now pays an almost 3% annual dividend. Its PE is slightly less than the two previously mentioned defense plays, at just over 16. And the company trades at 1.95 times sales.
The company continues to win global business, as Chairman, President and CEO Jim Taiclet stated, “Moreover, our 21st Century Security strategy is resulting in new business successes, including the award of the transformational AIR6500 integrated air and missile defense program by the Australian Defence Force, which will serve as a blueprint for future joint all-domain operations worldwide.”
As global defense spending and budgets rise to meet the nation state challenges we face today, global providers of defense platforms and systems will see demand rise for their goods, as well as the expertise to support and maintain them. Huntington Ingalls, BAE Systems, and Lockheed Martin are well positioned to meet the challenges of our current geopolitical environment, and provide the quality and precision armament demanded by their customers.
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HII shares were trading at $237.69 per share on Tuesday morning, up $1.24 (+0.52%). Year-to-date, HII has gained 5.42%, versus a 20.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Steven Adams
After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA. More...
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