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Defense stocks are “still attractive” after rallying on Monday as investors weighed the effects of the deadly terrorist attack on Israel, according to analysts at Citibank.
“We continue to expect low-single-digit top-line growth for the [U.S. Department of Defense] and mid-single-digit growth for defense contractors through 2030 as spending mix shifts to the weapons-buying accounts,” Jason Gursky, analyst at Citibank, said in an October 9 report. “The events of this past weekend make this outcome more likely, in our view, as they demonstrate that the threat environment to the U.S. and its allies remains high.”
Aerospace & Defense Stocks, Oct. 9 % change Northrop Grumman (NYSE:NOC) +11.0% L3Harris Technologies (NYSE:LHX) +10.0% Huntington Ingalls Industries (NYSE:HII) +9.3% Lockheed Martin (NYSE:LMT) +8.9% General Dynamics (NYSE:GD) +8.4% CACI International (NYSE:CACI) +5.8% RTX (NYSE:RTX) +4.6% BWX Technologies (NYSE:BWXT) +4.6% Axon Enterprise (NASDAQ:AXON) +4.6% Leidos Holdings (NYSE:LDOS) +3.8% Curtiss-Wright (NYSE:CW) +3.5% Heico (NYSE:HEI) +3.0% Moog (NYSE:MOG.A) +2.8% Rocket Lab USA (NASDAQ:RKLB) +2.7% Teledyne Technologies +2.3% TransDigm Group (NYSE:TDG) +2.0%
Israel this week began gearing up for what may become a prolonged ground assault in the Gaza Strip to punish Hamas for a weekend attack that killed more than 900 Israelis and left more than 2,400 wounded. A U.S. aircraft carrier strike force is due to arrive today in the Eastern Mediterranean to support Israel, which also will receive munitions and other supplies from the U.S. military.
Citibank’s Buy-rated defense stocks include General Dynamics (GD), Leidos (LDOS), L3Harris Technologies (LHX), Lockheed Martin (LMT) and SAIC (NYSE:SAIC).
Defense-industry stocks as a group have underperformed the broader market this year amid concerns that legislative gridlock in Washington would lead to spending cuts on defense, according to Citibank.
“We’ve argued, however, that the threat environment drives spending and that the potential for near-peer conflict is likely to accelerate military modernization as the U.S. invests in the tools of deterrence,” the report said. “This past weekend’s events, in our view, are likely to act as a reminder that the world remains a volatile place and that the U.S. will need to continue to play a stabilizing role in it.”
Defense contractors aren’t likely to see an immediate jump in revenue from the war in Israel, because of the long lead times in foreign military sales, according to Citibank. Instead, aerospace and defense companies are more likely to see growth next year and in 2025.
“It takes time for industry capacity to be added and for production rates to ramp, and at this point, we expect growth to accelerate into the mid-single digits over the next couple of years,” according to Citibank. “In addition to top-line growth, we expect industry margins to begin expanding in 2024 as pre-pandemic backlog rolls off, as new business is priced to better reflect today’s cost reality and as mix shifts to more production and international work versus lower-margin research, development, testing and evaluation.”