LMT - Why are defense stocks falling? Goldman downgrades Lockheed Northrop Raytheon

Some of the biggest names in the defense industry declined Friday after analysts at Goldman Sachs downgraded their stocks.

Lockheed Martin ( NYSE: LMT ), the biggest U.S. defense contractor, was cut to Sell from an investment rating of Neutral on its limited ability to buy back shares.

“While Lockheed ( LMT ) has committed to large share repurchases near-term, much of that may now have already occurred, and we see limited capital deployment upside to that, with downside risk to free cash flow should Lockheed ( LMT ) at any point revise its research and development cash tax interpretation to match that of the rest of the industry,” according to Goldman.

Raytheon ( NYSE: RTX ) was downgraded to Neutral from Conviction Buy because of its smaller exposure to the booming market for commercial aircraft.

“Raytheon is relatively well positioned within the defense end-market; but has seen recent industry outlay pace and supply chain challenges, which could continue into 2023 and which put the 2025 targets at risk in the segments,” according to Goldman.

Northrop Grumman ( NYSE: NOC ) was downgraded to Sell from Neutral on its current valuation and possibility of pressures on the U.S. defense budget.

“Northrop ( NOC ) trades at the high-end of its long-term historical valuation range relative to the S&P500 ( SP500 ), which historically tends to correlate with early stages of defense budget growth and/or an accelerating total defense budget,” according to Goldman. “Northrop ( NOC ) is also the most expensive defense prime we cover, trading at a larger than historical average relative premium to the group.”

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