Defense stocks will still cost a lot in 2025

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2024 was a good year. Defense stocks. January 1 to December 30, 2024 S&P Aerospace & Defense ETF (NYSEMKT:XAR) It posted an impressive 30% gain, even outperforming the broader S&P 500 And the amazing performance of 26.5%. The good news is.

The bad news is that the more shares are issued, the more expensive they become, and probably not a good deal. Three months ago, I concluded that this has become a defensive stock. I warned investors Defense stocks cost a lotAnd you won’t believe what happened next.

Three months later, eight of the 10 largest defense stocks I reviewed in that column saw their price-to-sales ratio decline. The two exceptions — the two defensive stocks that have become more expensive over the past three months — are Kratos defense and safety (NASDAQ: KTOS )Believe it or not, he won a big Pentagon contract earlier this month Boeing (NYSE:BA).

Why did defense stock prices slide?

I seriously doubt it was just because I pointed out the sky high prices in the sector. In part, I guess, because defense stocks have fallen Most of it Stocks fell. Over the past three months, the S&P itself has dropped a fraction of a percentage point. In part, it probably had something to do with the election, and investors anticipating the incoming Trump administration could cut defense spending (for example, by cutting military aid to Ukraine).

But I believe, in part, that defensive stocks may actually have fallen because they are too expensive. Here’s the thing:

they Still Too much cost.

Image source: Getty Images

Let’s pick up on the argument I made back in October. To determine whether defensive stocks are currently “overpriced,” I compared the 10 years from 2004 to 2013, the 10 years from 2014 to 2023, and the average valuation of the entire 20-10 popular defense stocks. Year time. To do this, I pulled data from my favorite financial data provider on the stocks’ average enterprise-value-to-sales ratio. S&P Global Market Intelligence.

(The enterprise-value-to-sales ratio, by the way, is a good way to calculate price-to-sales ratios and adjust for whether stock has more cash on the balance sheet than debt.) Here’s how they work. Numbers look.

Company	2004-2013	2014-2023	2004-2023
Boeing	0.89	1.83	1.36
General variable (NYSE:GD)	1.04	1.68	1.36
Huntington Ingalls (NYSE: HII )	0.51*	1.14	0.64*
Kratos protection and security solutions	0.97	2.21	1.59
Leidos Holdings (NYSE: LDOS )	1.5**	2.21	1:34**
L3 Harris Technologies (NYSE: LHX )	1.44	2.84	2.14
Lockheed Martin (NYSE: LMT )	0.81	1.78	1.30
Northrop Grumman (NYSE:NOC)	0.74	1.94	1.34
RTX (NYSE: RTX )	1.42	2.07	1.74
Textron (NYSE: TXT )	1.31	1.17	1.24
Average	1.06	1.89	1.40

Data source: S&P Global Market Intelligence. *Huntington Ingalls data begins in 2011, the year Northrop Grumman spun off Huntington Ingalls as a separate company. **Ledos data starts in 2006, the year of its IPO. 2014 average enterprise price-to-sales ratio data is missing because the company’s 2014 By changing the fiscal year in 2015, slightly distorting the data.

Next, I compared the prices of these stocks today, recalculating enterprise-value-to-sales ratios (to maintain an apples-to-apples comparison), but presenting price-to-sales values (because those are easier for most investors to find and quality check). :

Company	EV/S today	Price-to-sales ratio today
Boeing	2.38	1.43
General variable	1.77	1.57
Huntington Ingalls	0.89	0.66
Kratos protection and security solutions	4.07	3.95
Leidos Holdings	1.49	1.29
L3 Harris Technologies	2.50	1.93
Lockheed Martin	1.83	1.64
Northrop Grumman	2.00	1.71
RTX	2.45	2.00
Textron	1.18	1.06
Average	2.06	1.72

Source: Yahoo! Finance

So what can you conclude from the above? Well, the first and most surprising fact is this one Out of the 10 stocks mentioned above, it costs now Less Compared to the average valuation of the past 20 years: Techron shares, which have traded at 1.24x enterprise value over the past 20 years, are now trading at just 1.18x. That’s not exactly a screaming deal, but in the world of expensive defensive stocks, it still seems relatively cheap.

As for the rest of these stocks, they may not be as overvalued as they were three months ago, but they still cost a lot — certainly more than their historical cost. So my prediction today, just like three months ago, is that, on average, defensive stocks will underperform the broader stock market.

Feel free to come back in another three months, and let me know if I’m wrong.

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Rich Smith It has no place in the said shares. He has positions in the Motley Fool and recommends L3Harris Technologies. Motley Fool recommends Lockheed Martin, RTX, and Textron. The Motley Fool has Disclosure Policy.

In 2025, defense stocks will still cost a lot Originally published by The Motley Fool.