In this article, we will take a look at the 10 most undervalued defense stocks to buy according to hedge funds. To see more such companies, go directly to 10 Most Undervalued Defense Stocks To Buy According To Hedge Funds.
5. Textron Inc. (NYSE:TXT)
Number of Hedge Fund Holders: 36
Textron Inc. (NYSE:TXT) is an aircraft company whose products are used in the defense sector.
In January, Textron Inc. (NYSE:TXT) posted its fourth-quarter results, according to which its adjusted EPS in the period came in at $0.94, missing estimates by $0.13. Revenue in the quarter increased by about 9.3% on a YoY basis to reach $3.63 billion, beating estimates by $30 million. For 2023, Textron Inc. (NYSE:TXT) expects its revenue to total about $14.0 billion, versus the consensus estimate of $13.81 billion.
GAAP EPS for the full-year 2023 is expected to come in the range of $4.40 to $4.60, or $5.00 to $5.20 on an adjusted basis, versus the consensus of $4.50.
Insider Monkey’s proprietary database of 943 hedge funds and their holdings shows that 36 hedge funds had stakes in Textron Inc. (NYSE:TXT) at the conclusion of the fourth quarter of 2022. Among the biggest hedge fund stakeholders of Textron Inc. (NYSE:TXT) are Cliff Asness’ AQR Capital Management ($133.1 million stake) and Mario Gabelli’s GAMCO Investors ($120.3 million stake)
4. General Dynamics Corporation (NYSE:GD)
Number of Hedge Fund Holders: 46
Virginia-based General Dynamics Corporation (NYSE:GD) is among the world’s largest defense contractors in terms of arms sales. General Dynamics Corporation (NYSE:GD)’s GAAP EPS came in at $3.58 during the fourth quarter, missing estimates by $0.04. Revenue in the quarter increased by about 5.9% on a YoY basis to reach $10.9 billion, beating estimates by $240 million. Net cash provided by operating activities in the period came in at $669 million.
General Dynamics Corporation (NYSE:GD) recently won a contract worth about $481.58 million for the sustainment of Prophet Enhanced detecting systems.
At the end of the last quarter of 2022, 46 hedge funds out of the 943 funds tracked by Insider Monkey had stakes in General Dynamics Corporation (NYSE:GD). The total value of these stakes was about $8.2 billion. The biggest stakeholder of General Dynamics Corporation (NYSE:GD) in this period was James A. Star’s Longview Asset Management. The fund owns a whopping 28.3 million shares of the defense company.
3. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 49
Northrop Grumman Corporation (NYSE:NOC) ranks 3rd in our list of the most undervalued defense stocks to buy according to hedge funds. In February, Northrop Grumman Corporation (NYSE:NOC) said it entered into an accelerated share repurchase agreement with Bank of America to buy back $500 million of its common stock.
Northrop Grumman Corporation (NYSE:NOC) recently declared a quarterly dividend of $1.73 per share. The dividend was payable on March 15.
At the end of the fourth quarter of 2022, 49 hedge funds tracked by Insider Monkey reported owning shares of Northrop Grumman Corporation (NYSE:NOC). The total worth of these stakes was $1.5 billion. The biggest stakeholder of Northrop Grumman Corporation (NYSE:NOC) among these hedge funds was Rajiv Jain’s GQG Partners which had a $438 million stake in the company.
LRT Capital made the following comment about Northrop Grumman Corporation (NYSE:NOC) in its October investor letter:
“Based in Virginia, Northrop Grumman Corporation (NYSE:NOC) is one of the world’s largest defense contractors with annual revenue more than $30 billion. The company operates in a cozy oligopoly, that after decades of consolidation the US defense market is now controlled by five large companies: The Boeing Company (BA), General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), and Raytheon Technologies Corporation (RTX).
Industry barriers to entry are immense, government procurement cycles are extremely long, and the consolidated industry structure reflects this. This industry structure has allowed Northrop to earn stable mid-teens returns on invested capital (ROIC) and grow earnings per share at a rate of over 13% per year in the past decade, despite a topline that has grown only in-line with inflation. Even after the recent run-up in the stock price, it trades at approximate 15x, next year’s earnings estimates, far below the S&P 500 index, despite being an above average company. While nominally, there are five major defense contractors, the true industry concentration is even higher because not all companies compete in all possible business segments. General Dynamics’ division submarine division, Electric Boat, is the sole supplier of nuclear power submarines in the United States. Lockheed Martin is the sole supplier of the F-35 and F-22. Northrop was the sole bidder on the contract to develop the next generation of intercontinental ballistic missiles; and so on…” (Click here to read the full text)
2. Raytheon Technologies Corporation (NYSE:RTX)
Number of Hedge Fund Holders: 51
Aerospace and defense company Raytheon Technologies Corporation (NYSE:RTX) ranks 2nd in our list of the most undervalued defense stocks to buy according to hedge funds. In February, Bofa included Raytheon Technologies Corporation (NYSE:RTX) in its top picks for 2023 in the industrials sector. BofA has a $120 price target on Raytheon Technologies Corporation (NYSE:RTX) which presents a decent upside potential from the current levels.
At the end of the fourth quarter of 2022, 51 hedge funds out of the 943 funds tracked by Insider Monkey had stakes in Raytheon Technologies Corporation (NYSE:RTX). The net worth of these stakes was about $1.8 billion. The biggest hedge fund stakeholder of Raytheon Technologies Corporation (NYSE:RTX) during this period was Dmitry Balyasny’s Balyasny Asset Management which had a stake worth about $230 million.
Carillon Tower made the following comment about Raytheon Technologies Corporation (NYSE:RTX) in its Q3 2022 investor letter:
“Raytheon Technologies Corporation (NYSE:RTX) announced strong results led by strength in its commercial segment, but weakness in its defense business led to investor consternation. Management guided to a recovery in this segment, citing both transitory supply chain issues and continued strong demand.”
1. Lockheed Martin Corporation (NYSE:LMT)
Number of Hedge Fund Holders: 53
Lockheed Martin Corporation (NYSE:LMT) is one of the most notable defense companies in the world. Lockheed Martin Corporation (NYSE:LMT) remains one of the top choices of US Army and Navy for their warfare needs. Lockheed Martin Corporation (NYSE:LMT) is consistently winning new contracts from the US military.
During the fourth quarter of 2022, Lockheed Martin Corporation (NYSE:LMT)’s adjusted EPS came in at $7.79, beating estimates by $0.42. Revenue in the quarter increased by 7.1% on a YoY basis to reach $18.99 billion, beating estimates by $740 million. For fiscal 2023, Lockheed Martin Corporation (NYSE:LMT)’s net sales are expected to total in the range of about $65 billion to $66 billion, versus the consensus of $65.75 billion.
In January, Lockheed Martin Corporation (NYSE:LMT) declared a quarterly dividend of $3.00 per share, in-line with the previous dividend. Forward dividend yield at the time came in at 2.61%.
As of the end of the last quarter of 2022, 53 hedge funds tracked by Insider Monkey reported owning stakes in Lockheed Martin Corporation (NYSE:LMT). The biggest hedge fund stakeholder of Lockheed Martin Corporation (NYSE:LMT) was Rajiv Jain’s GQG Partners which owns a $560 million stake in the company.
Here is what Vltava Fund has to say about Lockheed Martin Corporation (NYSE:LMT) in its Q3 2022 investor letter:
“LMT is one of the world’s largest aerospace and defence companies. The war in Ukraine has reminded investors and the wider public just how important these companies are. The aerospace and defence industry in the USA is an established oligopoly. This means that a few large firms play a dominant role. While collectively they comprise an oligopoly, individually they often have monopoly positions in particular narrower segments. Their main counterparty is the US government, a key customer in what is known as a monopsonist position. This is a rather unusual situation, but one that is very advantageous for companies such as LMT.
LMT has a strong and long-term sustainable competitive advantage ensuing from the fact that its products are developed and manufactured at an extremely high level of technology and complexity, its development and contract cycles are measured in decades, and the costs for the government to switch to alternative suppliers are high. Moreover, part of the production is classified as secret, which further takes the wind out of the sails of potential competitors. This results in a very high return on capital and admittedly a slowly but steadily growing business.
In most NATO countries, which are LMT’s customers, defence outlays are based upon the size of GDP. This is currently growing very fast in nominal terms due to inflation in most countries. A number of countries have also announced significant increases in defence budgets, whether it be Germany, which aims to get to the NATO-agreed 2% of GDP, or Poland, which wants to spend more than twice as much on defence…” (Click here to see the full text)
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