CA - Lockheed Martin RTX And L3Harris: Any Value Left In The Defense Sector?

2024-04-01 13:20:29 ET

Summary

• Lockheed Martin, RTX Corp. and L3Harris Technologies are defense companies whose stocks have benefited to varying degrees from the recent heightened geopolitical tensions.
• In this article, I'll take a look at LMT, RTX and LHX stocks, share what I like best about each company and why I own them in my diversified portfolio.
• However, given the strong performance of LMT stock in particular since Russia's invasion of Ukraine, I explore the question of whether the stocks are already overvalued.
• I will provide an updated discounted cash flow valuation for each stock and discuss whether the defense sector in general and the three stocks in particular still represent value.

Introduction

There is no doubt that Russia's invasion of Ukraine - which began more than two years ago - and the conflict in Israel have benefited major U.S. defense contractors - or at least their stocks. In my view, knowing about the typically very long lead times of, in particular, major defense programs, it is a common misconception that defense companies benefit directly from the escalation of conflicts. However, it is difficult to argue against the longer-term tailwinds resulting from increased geopolitical tensions and, in particular, rising defense spending in the European Union.

Figure 1 compares the performance of the iShares U.S. Aerospace & Defense Sector ETF ( ITA ) to the total return of Lockheed Martin Corp. ( LMT ), RTX Corp. ( RTX ) and L3Harris Technologies, Inc. ( LHX ) - three defense companies that I cover here on Seeking Alpha. LMT stock outperformed the index and its peers, due in large part to its leading F-35 fighter jet program, which is in increasingly high demand. RTX stock is still in recovery mode from the geared turbofan ((GTF)) issue that led to significant recalls in 2023. Finally, LHX stock is the laggard, and I attribute this to the still-prevalent uncertainties surrounding the bold acquisition of Aerojet Rocketdyne and concerns about the resulting high debt levels....

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