Meeting the defense needs of the federal government may be a non-cyclical business, but don’t be fooled into thinking defense stocks are immune to performance ebbs and flows. Equipment needs changes, and technologies update and improve. Companies in this sliver of the market still have to compete for business. Never even mind that President Donald Trump has proven quite cost-conscious, whittling down the cost of keeping Air Force One up to date by a few hundred million bucks.
To that end, here’s a rundown of 10 defense and aerospace stocks investors may want to shed sooner than later.
Some are stuck in long-term ruts, while others may only be facing a short-term headwind. In a couple of cases the problem is a purely technical one working against the stock. In call cases though, there are lower-risk, higher-reward alternatives available. In no certain order….
Sturm Ruger & Company (RGR)
Sturm Ruger & Company (NYSE:RGR) serves the law enforcement and personal firearms market more than it caters to the military, though all three markets often behave as if they’re one.
Whatever the case, Sturm Ruger shares are a perennial disappointment. RGR stock is currently priced where it was in the middle of 2012, and though it has at least paid a dividend in the meantime, somehow the yield of 2% doesn’t seem like enough compensation in and of itself.
It doesn’t look like there’s a great deal of reason to expect growth in the foreseeable future either. In late October it posted Q3 earnings of 52 cents, falling short of the expected 92 cents per share of RGR stock.
Aerojet Rocketdyne Holdings (AJRD)
Aerojet Rocketdyne Holdings (NYSE:AJRD) is better known for its work on the space exploration front; it was the developer of the propulsion system used to send the NASA Mars InSight safely to the red planet last month. Its technologies, however, have a much simpler and more common use as part of the country’s tactical missile defense system.
It’s not a bad business to be in, but AJRD shares are uncomfortably priced, and aren’t going to earn their way into a reasonable valuation soon enough to stave off a setback. The forward-looking P/E of 24 is well above the industry average, and though it topped its third-quarter earnings estimate, its backlog of work slipped from $3.9 billion in the second quarter to $3.7 billion as of the end of the third quarter.
It’s a modest decline, but could indicate the beginning of a trend.
Northrop Grumman (NOC)
It may be one of the biggest and most familiar defense stocks, but that doesn’t appear to be of any benefit to Northrop Grumman (NYSE:NOC) right now.
Northrop Grumman brings a variety of solutions to the aerospace and defense arena. It makes aircraft and cyber warfare tools, offers training and even does military logistics, just to name a few. However, its diversity hasn’t changed the fact that the company’s probably going to earn less per share in 2019 than it did in 2018. Per-share profits are projected to slide from $19.11 to $18.02 despite projected sales growth for that timeframe.
That outlook has also allowed a NOC stock to build some bearish momentum. It has fallen from $360 to $262 just since April, and the downtrend is still intact.
L3 Technologies (LLL)
To be fair, one would be hard-pressed to find a good fundamental reason to let go of L3 Technologies (NYSE:LLL). It’s priced at only 13 times its trailing per-share profits, and even on a forward-looking basis it’s priced at a modest 16 times 2019’s expected bottom line. Sales are on pace to grow roughly 6% this year, and rise by roughly the same next year, driving solid profit growth.
And yet, there it is. LLL stock has fallen 19% just since October, and is down 9% on the year. One more bad day could drag shares to new 52-week lows.
Investors may not even fully understand why they’re doubting the company’s foreseeable future, but that doesn’t make L3 Technologies any less risky.
Axon Enterprise (AAXN)
The third-quarter print from Axon Enterprise (NASDAQ:AAXN) was impressive to be sure. Sales were up 16% year-over-year, and operating income was up 300%. Both figures topped estimates. The quarter underway as well as all of the coming year should also benefit from double digit growth as sales of the Taser 7 weapon and Body 3 camera pick up steam.
Still, AAXN stock fell 17% in response to that earnings report and strong outlook. What gives?
Lakewood Capital Management’s Anthony Bozza may have the best explanation, saying “Assuming some international sales and further penetration in the U.S., normalized sales are likely closer to 90,000 units [versus last year’s 147,000], and we believe pulled-forward sales could result in actual sales below these levels for a period of time. At the current 30% operating margin, we estimate normalized earnings are $0.70 per share, and at a 20x multiple, we value this business at $14 per share.”
AAXN stock is currently priced at $44 per share.
Heico (NYSE:HEI) isn’t a household name. Part of that obscurity is a function of size. It’s no slouch, with its market cap of about $10 billion, but it’s lost in a sea of bigger players.
The bulk of its obscurity, however, is the result of the fact that it doesn’t make an actual final product like a fighter plane or a helicopter. Rather, it makes the electronics and specialized parts found within more familiar military hardware. That’s often a recipe for stable success … and remaining off the radar. And to be fair, if nothing else Heico is a consistent earner.
It’s anything but a cheap stock, however. Valued at 47 times its trailing earnings and 40 times next year’s projected income, HEI stock has rallied well ahead of its bottom line and is ripe for a correction.
United Technologies (UTX)
United Technologies (NYSE:UTX) had been seriously considering a breakup of its three distinct business lines for years now. But, it was only this year it has decided to actually pull the trigger.
It’s supposed to be a win all around, allowing its defense, elevator and HVAC units to each operate independently, and in turn unlock the maximum value of each. And, most observers believe that’s how things will pan out in the end.
Getting there, however, could be a long and winding road that offers nothing of any real value to shareholders. As Melius Research’s Carter Copeland put it, “This is sort of deal purgatory while you wait for the transaction to work its way through,” adding “There are a lot of hedge-fund owners who probably say, ‘Oh, this is what I was waiting for, and now I got it. And I’m not sure what my next catalyst is, so I’ll move on.’”
Huntington Ingalls Industries (HII)
If you’ve ever wondered which companies build ships for the U.S. Navy, Huntington Ingalls Industries (NYSE:HII) is one of them, and arguably the most important. It has built more ships than any other outfit ever has for the Navy, ranging from submarines to aircraft carriers to destroyers.
It can be a lucrative business to be in, and one would think with a pro-military president like President Trump in the White House, now would be a great time to be in the shipbuilding business.
That’s not exactly the case though. While modest revenue growth this year is going to drive a big boost to the bottom line, next year’s expected 2.7% improvement in revenue is expected to let per-share profits slip from $18.56 this year to $15.91.
And, if you’ve ever wondered who makes the unmanned aerial drones used by the military, AeroVironment (NASDAQ:AVAV) is your answer.
There’s no denying drones are the future, even more than they’re the present. As they improve and customers (military and otherwise) continue to gain comfort with their capabilities, sales will rise.
All things are relative, however, given the market’s response to last quarter’s results. While its fiscal Q2 top line was up 11% year-over-year, profits fell 20%. Per-share earnings of 29 cents per share were nearly twice the 16 cents per share analysts were modeling, and its backlog grew considerably.
Still, priced at 49 times next year’s expected earnings, investors needed more. They may well still feel that way despite the post-earnings plunge of 17%.
Lockheed Martin (LMT)
Finally, add Lockheed Martin (NYSE:LMT) to your list of defense stocks to sell sooner than later.
It’s certainly not a company that needs an introduction. Lockheed Martin is the maker of a variety of weapons systems as well as a logistics company. Its best-known project is the ultra-advanced F-35 jet fighter, which has been riddled with delays and cost overruns.
That’s not the only reason one might want to shed LMT stock, however. In fact, the most painful part of the F-35’s development finally appears to be in the past. Rather, the reason Lockheed Martin may be tough to hang onto for the foreseeable future is the stock’s well-established bearish momentum. LMT stock is down 19% from its April peak, and within easy reach of new 52-week lows.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.