Investors looking to add some firepower to their portfolios should pay attention to the aerospace and defense industry. Beyond the several geopolitical conflicts adding a tailwind of demand, a bigger industry development may be the ongoing shift toward more high-tech solutions. Companies capitalizing on this "defense tech" theme are well-positioned to deliver positive returns.
Here are two outperforming stocks that could be great buys this month.
1. Lockheed Martin
Lockheed Martin (NYSE: LMT) is recognized as one of the world's largest defense manufacturers with a portfolio of high-profile fighter jet aircraft, helicopters, and missile systems. The company has expanded into space with satellite communications, alongside a growing number of cybersecurity solutions.
The stock has been a big winner this year, rallying more than 25% to a record high amid a string of better-than-expected earnings. In the second quarter, Lockheed delivered a solid 9% increase in revenue while segment operating profit climbed by 10% from the prior-year quarter.
Lockheed is citing robust performance across all segments. Notably, products like Guided Multiple Launch Rocket Systems (GMLRS), Javelin anti-tank missiles, lasers, and radars are being used extensively in active Eastern European battlefields with a growing order backlog.
A key development has been the restart in deliveries of the F-35 fighter jet program to the U.S. government following nearly a year of being suspended pending a required technology upgrade. Lockheed is producing upward of 156 F-35 aircraft per year and expects to deliver between 75 and 100 by year-end.
The latest trends have been strong enough for management to hike 2024 guidance, reaffirming the success of the company's 21st Century Security initiative. The strategy to integrate more advanced technologies across the product portfolio appears to be paying off.
The effort is opening up new growth channels and is expected to generate higher profitability. Innovations include artificial intelligence (AI) playing an increasing role in areas like missiles and fire control, and the rotary and mission systems unit. Overall, there's a lot to like about Lockheed Martin. High-quality fundamentals, earnings growth, and a 2.5% dividend yield make me bullish on the stock.
2. General Dynamics
General Dynamics (NYSE: GD) is another defense industry leader but stands out with a broad product portfolio. The company has a significant reach in military programs including land vehicles, weapons, and the C-130 Hercules transport aircraft. It is also involved in marine systems with Navy ships and submarines. The Gulfstream Aerospace subsidiary has been very lucrative with business jets in high demand.
This diversification has proven to be a winning combination. General Dynamics stock is up 33% over the year, reflecting accelerating growth and sharply higher profitability in recent quarters. Trends in the second quarter were particularly impressive, with revenue up 18% year over year driving a 21% increase in earnings per share (EPS).
In the aerospace segment, the launch of the G700 aircraft with ramped-up deliveries is a large part of the growth story, but the strength is across the board. The combat systems segment posted revenue growth of 18% with earnings jumping by 25% from the prior year quarter as management noted the highest level of orders since 2014.
The company has booked multiple large-scale contract awards in all segments, suggesting a robust operating environment with management revising full-year guidance higher.
Maybe the most interesting aspect of the company is its technology segment, which includes cybersecurity solutions such as National Security Agency (NSA) certified encrypted communications systems. In this case, General Dynamics has quickly emerged as a leader in this field, leveraging its specialized defense software expertise into data analytics for commercial applications. In my opinion, the many moving parts in General Dynamic's long-term outlook make the stock a good long-term bet.
The big picture for investors
General Dynamics and Lockheed Martin are both capitalizing on this theme of defense tech with an industry transformation underway. Coincidentally, the two stocks are both trading at a forward price-to-earnings ratio (P/E) of 20. I believe that this level of valuation premium is justified based on the operating and financial momentum. The ability of both companies to execute on a significant market opportunity should continue to reward shareholders.
Should you invest $1,000 in General Dynamics right now?
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Dan Victor has no position in any of the stocks mentioned. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.
2 Top Defense Tech Stocks to Buy in September was originally published by The Motley Fool