Stocks of the Week: Defense Companies Playing Catch-Up With Russia on Key Technology
Vladimir Putin’s invasion of Ukraine continues to dominate the headlines with the economic impacts quickly spilling over in oil, wheat and financial markets.
Against that backdrop, analysts and columnists at TheStreet and Real Money are looking at these picks for “Stocks of the Week.”
Lockheed Martin (LMT) $409.45. 5-day performance $5.96%;
Northrop Grumman (NOC) $409.67. 5-day performance 4.71%.
Defense industry companies are emerging front and center as stocks to watch for investors with Russian tanks rolling through European streets.
According to TheStreet’s Stephen “Sarge” Guilfoyle, Lockheed Martin (LMT) – Get Lockheed Martin Corporation Report and Northrop Grumman (NOC) – Get Northrop Grumman Corporation Report need to be on that list.
“Now, you know why Lockheed Martin and Northrop Grumman are both almost always present in varying size among my portfolio holdings,” Guilfoyle said last week. “It’s not that I love the concept of war. I don’t. No sane person does. It’s that I have been around the block more than once.”
As Guilfoyle said, large purveyors of an enhanced ability to defend oneself, or to project influence, nearly always have a market to address.
“Sometimes that market is large, as national security needs and the needs of allied nations do change over time,” he said. “That said, never has the need been higher when U.S. and allied national interests are either threatened or perceivably could be threatened by so called “near peer” adversaries.”
Current ‘near peers ‘would be China, and quite obviously, Russia. Yet the U.S. is frighteningly behind both in a key technology.
“I have harped for so long on playing catch-up where hypersonic weapons are concerned,” Guilfoyle said. “Both China and Russia are ahead of the U.S. on this relatively new, and quite indefensible method of warhead delivery. When it comes to hypersonic delivery, the U.S. is quite possibly the ‘near-peer.'”
Now, a turn for the worse has clearly been taken. It comes as no surprise that among industrials named as outperformers were Lockheed Martin and Northrop Grumman.
Here’s how Guilfoyle views each stock.
Lockheed Martin – Perhaps best known currently for the uber-expensive F-35 fighter aircraft, LMT operates in four business segments: Aeronautics, Missiles and Fire Control, Rotary and Mission, and Space.
“The recent focus, with mixed success, has been on the development of both offensive and defensive hypersonic weapons,” Guilfoyle said. “Lockheed is expected to earn a rough $26.60 per share for FY 2022 on revenue of more than $66.15B. The stock trades at 14 times forward looking earnings, and yields 2.9%.”
The stock triggered a breakout sprung by a $378 pivot created by a double bottom reversal that hit its nadir in November. “The stock is up 2% late last week and does not come in technically overbought,” Guilfoyle added.
Here’s his play on LMT:
– Target Price: $455
– Pivot: $378
– Panic: $358 (break of 200-day SMA)
Northrop Grumman – Currently known for developing the B-21 Raider long range, stealth strategic bomber, Northrup also operates four business units, Aeronautics Systems, Mission Systems, Defense Systems, and Space Systems.
“At this firm too, there has been a focus on hypersonic weapons delivery in coordination with Raytheon Technologies (RTX) – Get Raytheon Technologies Corporation Report to provide an alternative to Lockheed’s approach,” Guilfoyle said. “Northrop is expected to earn $24.85 per share in FY 2022 on revenue of about $36.6B. The stock trades at 15 times forward looking earnings and yields 1.6%.”
Here’s his play on NOC:
– Target Price: $490
– Pivot: $409
– Panic Point: $368 (break of 200-day SMA)
Fidelity National Financial (FNF) $47.71. 5-day performance (-) 0.08%.
TheStreet’s Paul Price is tracking Fidelity National Financial, a major player in title insurance and other real estate and mortgage services which recently reported fourth-quarter and full-year results.
On a per-share basis, FNF reported net income of $1.87. Earnings, adjusted for non-recurring costs, were $2.16 per share. The company posted revenue of $4.8 billion in the period. For the year, Fidelity reported profit of $2.42 billion, or $8.44 per share. Revenue was reported as $15.64 billion.
“There has been great progress over the past six years across all major business metrics,” Price wrote recently on Real Money. “Most notable since the end of 2015 were a near doubling in the dividend rate and approximately 350% in EPS.”
Continuous shareholders have made money, but nothing like what would have been expected considering FNF’s growth in fundamentals. That embedded value creation suggests a nice “catch-up” move awaits for buyers at today’s very modest valuation, Price noted.
“A simple reversion-to-the-mean valuation suggests FNF could jump to north of $100 by this time next year,” he added. “Achieving that realistic goal would deliver over 121% in total return.”
FNF now sells for less than it did in October of 2017 when EPS were on pace for $2.38, not $7.00 – $8.00. As Price puts it, paying less to get more is always a good thing.
“Independent research from Fast Graphs is in the same ballpark but uses lower estimates for both 2021 and 2022 than Value Line does,” he said. “Even so, Fast Graphs thinks FNF will be $82.80 by year-end 2022 and over $90 by Dec. 31, 2023.”
Hitting its lower-end target would still provide about 81.6% in total returns by the end of 2022. “In my world that is mighty appealing,” he added. “Future stock market action can never be guaranteed. That said, FNF just finished an all-time record year. “
Fidelity National Financial checks all of Price’s stock boxes.
“It’s available at a huge discount to its own normalized valuation,” he said. “It sports an insanely low price-to-earnings and a generous yield. Its balance sheet is solid and the firm continued to make huge profits right through the entire pandemic.”
Polaris (PII) $118.60. 5-day performance (-)3.89%
TheStreet’s Timothy Collins is keeping an eye on this name — he sees PII as one of the few charts with a decent pattern.
“The weekly setup has bullish W-shaped price action,” Collins said. “Despite the overall weak market, the Full Stochastics has been climbing steadily while the StochRSI is already deep into bull territory. The 10-week simple moving average (SMA) is on the verge of pushing through the 21-week SMA. Both serve as support in the $115 to $117 region. I anticipate resistance around $130, but if bulls can push through then $145 seems very plausible.”
Collins spent some time recently at the Miami boat show.
“There, I found Polaris is definitely a name to watch,” he said. “An under-the-radar tie in here is Vision Marine (VMAR) . Polaris leads the pontoon [boat] industry with its Bennington Pontoon. If they are looking to go electric, VMAR has the perfect EV motor and software to outfit Bennington pontoons. It could make a solid partnership or even company fit. By that I mean Polaris could certainly look to acquire VMAR over the next year.”
As the Covid impact lessens and people get back out into the world, it’s useful to hear what Polaris management thinks the effect on guidance will be moving forward.
“I believe it will lean positive, so I’m optimistic. Unfortunately, a heavy market could keep buyers away,” Collins added. “Keep an eye on the big picture here. If the company story is strong while the market is weak, it may present a long-term entry opportunity.”
Note: Polaris issued an update on its FY 2022 earnings guidance on February 25. The firm provided EPS guidance of $10.10-$10.40 for the period, compared to the Thomson Reuters consensus EPS estimate of $10.20. The company issued revenue guidance of $9.20 billion-$9.50 billion, compared to the consensus revenue estimate of $9.29 billion.