By Philip van Doorn, MarketWatch
With U.S. military strikes top and center in the news, readers have been introduced to some of the most advanced and powerful weaponry built by aerospace and defense companies.
Because of the complexity of government procurement processes, the use of certain missiles doesn’t necessarily mean the makers of those weapons will benefit from near-term increases in sales. But it’s helpful for investors to know which contractors have been most successful recently, and which are most favored by analysts.
Tomahawk cruise missiles, manufactured by Raytheon Co. , were used against a Syrian airfield on April 6. The Massive Ordinance Air Blast (MOAB), or “mother of all bombs,” is made by Boeing Co. /zigman2/quotes/208579720/composite BA -3.39% and was used against Islamic State terrorists in Afghanistan last week. Raytheon is the fourth-largest U.S. defense contractor, with a market capitalization of $44.5 billion, while Boeing is the biggest player, with a market cap of $106.8 billion.
There are 28 aerospace and defense companies in the S&P 1500 Composite Index, which comprises the large-cap S&P 500 /zigman2/quotes/210599714/realtime SPX +0.30% , the S&P 400 Mid-Cap Index /zigman2/quotes/219506813/composite MID -0.51% and the S&P 500 Small-Cap 600 Index /zigman2/quotes/210599868/delayed SML +0.51% . The industry’s stocks as a group are up 7% this year, with dividends reinvested, while the S&P 1500 is up 4%.
Since Donald Trump was elected president Nov. 8, the aerospace and defense industry group has risen 15%, compared with 10% for the index. Trump has said he wishes to increase defense spending by 10%, or by $54 billion.
It remains to be seen if the president will get his way, but the stock market tends to be forward-looking, and the recent action shows investors believe favorable times are ahead for defense contractors.
Here are several sets of data showing which companies have excelled and which are favored most by Wall Street analysts.
The Big Five
There are five U.S. aerospace and defense companies with market caps over $40 billion — the Big Five. Here they are, in size order, along a comparison of total returns for their stocks, compared to the index:
|Company||Ticker||Total return - 2017 through April 13||Total return 2016||Total return - 3 years||Total return - 5 years|
|Boeing Co.||/zigman2/quotes/208579720/composite BA||13%||11%||57%||174%|
|Lockheed Martin Corp.||/zigman2/quotes/200691238/composite LMT||7%||18%||90%||257%|
|General Dynamics Corp.||/zigman2/quotes/208560027/composite GD||8%||28%||89%||205%|
|Northrop Grumman Corp.||/zigman2/quotes/205518355/composite NOC||3%||25%||117%||342%|
|S&P 1500 Index||4%||13%||36%||89%|
The numbers are breathtaking, and the forward price-to-earnings ratios have risen by quite a bit over the past year:
|Company||Ticker||Closing price - April 13||Consensus 2018 EPS estimate||Price/consensus 2018 EPS estimate||Price/consensus 2017 EPS on April 13, 2016|
|Boeing Co.||/zigman2/quotes/208579720/composite BA||$175.62||$10.26||17.1||14.0|
|Lockheed Martin Corp.||/zigman2/quotes/200691238/composite LMT||$268.00||$14.04||19.1||16.6|
|General Dynamics Corp.||/zigman2/quotes/208560027/composite GD||$186.73||$10.54||17.7||13.4|
|Northrop Grumman Corp.||/zigman2/quotes/205518355/composite NOC||$240.20||$13.34||18.0||16.8|
In comparison, the S&P 1500 is trading for 16 times consensus 2018 EPS estimates. This chart shows the movement of forward P/E ratios for the big five aerospace/defense stocks over the past five years:
You can see that, at times, the valuations have been even higher than they are now.
Even though the rise in forward P/E valuations over the past year doesn’t necessarily mean the stocks won’t perform well, analysts have majority “buy” ratings for only two of the Big Five: