President Trump takes office next week and is wasting no time in publicizing his plans for a second consecutive term. Prominent among these initiatives is DOGE, the Department of Government Efficiency, led by Elon Musk and Vivek Ramaswamy. Their mandate: to reduce federal government spending as much as possible. You’ve already talked about cutting $2 trillion worth of fat.
While there’s no guarantee that Musk and Ramaswamy will get the $2 trillion to cut, that prospect has investors worried about defense industry stocks. The Pentagon has always been a target when it comes to cutting government waste (remember the $600 hammer?), and recently expensive and high-profile programs — like the F-35 fighter jet or the Navy’s littoral combat ship — have been on the rise. Cost overruns, delays and even flat performance failures.
So perhaps it’s no surprise that Truist analyst Michael Ciarmoli has pulled back on defense-related stocks in recent weeks. At the same time, the 5-star analyst suggests that the aerospace sector offers a compelling entry point for investors.
“Intellectually 2025 feels like a ground hog day – going into 2024 investor sentiment was turning bearish on the aftermarket rally and heavy on the aero OEM production recovery. The setup for 2025 looks very similar and similar. However, while aircraft production may improve by 2025, the planned ramp-up in light comp is not happening as quickly as expected and we think the aftermarket still has legs. In the defense sector, the November election and the DOGE announcement dampened performance, but we believe the selloff created an attractive entry point, Ciarmoli commented.
So which stocks should investors hold during this dip? Ciarmoli has two clear favorites, and we turned to the TipRanks forum to find out what makes these picks stand out from the rest. Let’s dive in.
Lockheed Martin(LMT)
First up is Lockheed Martin, based in Bethesda, Maryland, and operating as the modern incarnation of two venerable names in the air, Lockheed and Martin Marietta. The modern company was founded by their merger in 1995, and today it has a market value of more than $ 114 – 114 billion.
Lockheed Martin is the manufacturer of some of the military’s most important combat platforms, such as the F-16 and F-35 fighter jets and the C-130 transport aircraft, along with a wide range of communications and surveillance satellites—that is. Only the tip of the iceberg of this company. Lockheed Martin also works with various US-aligned militaries around the world, adapting US systems to their needs or producing local variations on US gear.
Like most aerospace/defense firms, this company is deeply involved in the research and development of new technologies, weapons, and air and spacecraft. The company’s R&D arm, included in the famous Skunk Works, develops new technologies from spying and surveillance to hypersonic flight to digital design prototypes, and some of the things the public is familiar with.
Financially, Lockheed Martin has proven to be profitable, and has a history of returning capital to shareholders. Last quarter, 3Q24, the company generated $17.1 billion in total revenue, up 1.3% year-over-year, though it missed forecasts by $270 million. On the bottom line, LMT reported non-GAAP earnings of $6.84 per share, up 7 cents from 3Q23 and ahead of estimates by 40 cents. The company maintained its return on capital, and increased its stock repurchase authorization by $3 billion in Q3 to a new total of $10.3 billion. The company raised its common stock dividend by 5 percent to $3.30 per share. The dividend was paid on December 27. An annual rate of $13.20 yields 2.7 percent going forward.
We should note here that LMT shares have fallen in recent months. Shares peaked above $614 in October. Since then, the stock has fallen more than 20%.
For Truist’s Ciarmoli, who ranks in the top 2% of Wall Street stock experts, the two key points here are the reduced stock price and the possibility that DOGE-related worries are more encouraging than material. Speaking of Lockheed Martin, he said, “We believe that LMT’s recent rally has created a compelling entry point. Ultimately we believe DOGE-related fears are overblown, investors should realize that this is not sequestration 2.0, the risk level is high and US defense/NATO defense spending will continue to increase in the near future. Admittedly, the F-35 has a bulls-eye on its back, but we see a low probability of cancellation/restriction by AT, and we believe the mgmt’s growth framework will be conservative with missile-related changes accelerating and FCF improved.”
Based on this, Ciarmoli maintains a hold rating on LMT, with a price target of $579, which gives the stock a one-year upside of 19.5%. (Click here to view Ciarmoli’s record)
Lockheed Martin has a Moderate Buy rating from Street analyst consensus, based on 15 recent ratings, 7 Buy and 8 Hold. The stock has a price target of $483.97 and an average price target of $571.87, indicating a 12-month upside of 18%. (look out LMT stock forecast)
Northrop Grumman Corporation(NOC)
Another company was formed by merging established aerospace names. Northrop Grumman combines the heritage of two legendary aircraft designers, Northrop and Grumman, who produced some of the US military’s most iconic aircraft in the years leading up to and during World War II. Grumman built its reputation as a major supplier of naval fighter aircraft in the Pacific, while Northrop was more active in experimental designs.
Their modern corporate counterpart, Northrop Grumman, Founded in 1994, it is involved in many advanced military aircraft, including the B-2 stealth bomber, the Navy’s E-2 airborne radar aircraft, and the Air Force’s T-38. Supersonic advanced trainer. In addition, the company is developing the B-21 bomber, which is intended as a successor to the B-2.
Aerospace is just one part of Northrop Grumman’s activities. The company is also deeply involved in fields such as electronic warfare, integrated energy weapons and even unmanned mines. Apart from military programs, the company is working with NASA on the Artemis launch system. All this makes Northrop Grumman one of the main contractors of the US defense establishment and many foreign military agencies.
Turning to financial results, we find that Northrop Grumman posted $10 billion in 3Q24 last quarter. While that missed forecasts by $170 million, it was up 2 percent from last year. The company’s bottom-line EPS increased 13 percent year-over-year and came in at 94 cents per share, beating expectations. During the quarter, Northrop Grumman received net awards of $11.7 billion and reported a record operating profit of $85 billion.
Like its peer Lockheed Martin, above, Northrop Grumman has seen its share price decline in recent months. The stock was trading as high as $543 in early October, and today shares are down to $472.
In coverage of Northrop Grumman, Ciarmoli pointed out several reasons why the stock is worth a premium and reiterated that the stock’s recent decline is likely. “First, based on MGmt guidance, we believe the company will grow annualized FCF in the mid-teens through 2028, which is nearly double the growth rate of its peers. Second, the company’s franchised nuclear triad programs will serve as pillars of stability and revenue growth drivers and will materialize DOGE-related funding cuts.” Thirdly, NOC’s overall revenue growth will continue to accelerate to MSD in the coming years We believe equipment demand, with NATO-related spending and recovery in the space segment, has the potential to accelerate. “We believe the recent NOC peak in 2024 has created a compelling entry point.”
Gauging his position, Ciarmoli has set a buy rating here with a $544 price target to suggest a 15% share appreciation over a one-year horizon.
This stock requires a median consensus rating of Buy based on 14 reviews, evenly split between 7 Buy and 7 Hold. The stock’s price is $472.30 and the average price is $553.93, indicating a one-year gain of 17 percent in store for the next year. (look out NOC stock forecast)
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Disclaimer: The opinions expressed in this article are those of the featured analysts only. The content is intended for informational purposes only. It is very important to do your own analysis before making any investment.
