In his analysis, Herbert wrote that he believes the U.S. defense budget supports approximately 6% top-line growth for L3Harris, better than for any other prime defense contractor. Sales in the company’s communications business dropped about 12.5% in the first half of this year, but second-half sales are expected to improve by around 10%. L3Harris is RBC’s “highest conviction defense prime [contractor going ] into 2023 as we expect top-line outperformance off a higher margin base [to] be a positive catalyst.”
Herbert has initiated coverage of Northrop Grumman with an Outperform rating and a price target of $550. Shares currently trade at around $481.70, implying an upside potential of 14.2%. The average price target of 17 analysts is $494.60, and the stock’s 52-week range is $344.89 to $497.20. Northrop’s total shareholder return for the past year was 33.4%.
Northrop is “best positioned” of the prime defense contractors to benefit from the recapitalization of U.S. nuclear forces. Total federal spending on nuclear forces is expected to rise by about 6% this year to 8.5% in 2030. The company also has a strong position in the space market, which grew by around 20% in each of the past two years. Herbert expects a compound annual growth rate of around 10% for the space division through 2024.
RBC has initiated coverage on Leidos with a Sector Perform rating and a price target of $106. The stock trades at around $96.10, implying an upside potential of 10.3%. The average price target of 14 analysts is $118.58, and the stock’s 52-week trading range is $81.07 to $111.12. Total shareholder return for the past 12 months is negative 0.5%.
Leidos is the leading government service provider and is looking to transition to a solutions provider with a focus on defense systems. That is both good news and bad for investors. Margins are higher for solutions, but that could limit near-term upside as the company invests more in solutions and less in services. Recent contract wins for 2023 and 2024 will provide upside in the longer term but also could weigh on near-term profitability.
RBC initiated its coverage on Lockheed Martin with a Sector Perform rating and a price target of $460. The stock trades at around $428.70, implying an upside potential of 7.3%. The average price target of 18 analysts is $463.06, and the stock’s 52-week range is $324.23 to $479.99. Total shareholder return for the past year was 21.8%.
Lockheed is the world’s largest defense contractor and is expected to benefit from the larger U.S. defense budget as well as rising international defense spending. The company (and Herbert) believe that Lockheed needs new contract wins to boost its top-line results. Revenue is expected to grow by about 2% in 2023 and 3% in 2024, after a disappointing 2022. New defense programs that Lockheed is expected to compete hard for are next-generation air dominance (NGAD), future vertical lift (FVL) and next-generation interceptor (NGI).
Originally posted at 24/7 Wall St.
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