The paradigm for investing in defense stocks changed in a dramatic way when Russia invaded Ukraine in February 2022, and defense spending among the U.S. and its allies is set to rise further in the coming years.
But the Ukraine-Russia war is far from the only geopolitical flashpoint threatening to heighten defense spending. Aside from the increasingly strained relations between China and Taiwan, tensions in the Middle East also erupted into war between Israel and Hamas after surprise attacks by Hamas on Saturday, Oct. 7 killed more than 700 Israelis, according to reports as of midday Monday.
Israel declared war against Hamas the next day and initiated a “complete siege” of Gaza. More than 550 Palestinians have been killed, according to Gaza’s health ministry as of midday Monday.
The conflict has already pulled in neighboring countries and security is heightened in the region. Defense analyst Ian Bremmer of the Eurasia Group told CNBC that he predicts the war to continue for months, and possibly even years.
Getting down to dollars and cents, the fiscal 2024 National Defense Authorization Act calls for $886.3 billion in U.S. defense spending, up 3.3% from 2023 levels. Bank of America analyst Ronald Epstein expects U.S. Department of Defense discretionary spending will surpass the $1 trillion mark by fiscal 2026, creating big opportunities for defense companies. Defense stocks are attractive investments during periods of economic uncertainty because companies often profit from predictable, long-term government contracts.
Here are eight defense stocks to buy with big upside potential, according to Bank of America:
STOCK
IMPLIED UPSIDE FROM OCT. 6 CLOSING PRICE
Boeing Co. (ticker: BA )
60.1%
Northrop Grumman Corp. (NOC )
45.3%
General Dynamics Corp. (GD )
38.7%
Leidos Holdings Inc. (LDOS )
31.9%
KBR Inc. (KBR )
26.8%
CACI International Inc. (CACI )
22.1%
BWX Technologies Inc. (BWXT )
14.7%
Rocket Lab USA Inc. (RKLB )
211.1%
Boeing is one of the world’s two main suppliers of large commercial aircraft and is also one of the largest U.S. defense contractors. The company produces military aircraft, space systems, missile defense systems, satellites, space vehicles and battle management systems for the U.S. DoD. Epstein says investors are rightfully cautious when it comes to Boeing given the company’s long list of production problems with the 737 Max airliner, but Epstein says it appears the worst of the quality control issues have been addressed. Bank of America has a “buy” rating and $300 price target for BA stock, which closed at $187.38.
Northrop Grumman Corp. (NOC )
Northrop Grumman is one of the world’s largest weapons and military technology producers. Northrop shares reacted negatively to the company’s recent news that doesn’t plan to bid to be prime contractor for the U.S. Air Force’s Next Generation Air Dominance program, but Epstein says Northrop has a long history as a successful subcontractor. He says the company has a strong management team, a healthy balance sheet and an impressive capital return program that will help the stock outperform. Bank of America has a “buy” rating and $615 price target for NOC stock, which closed at $423.24.
General Dynamics Corp. (GD )
General Dynamics produces a range of vehicles and systems for the U.S. military. Epstein says demand for the company’s combat systems segment has strengthened, and he anticipates that “robust” revenue growth will help the company offset margin pressures from supply chain challenges and new program launches. He says the company’s combat systems portfolio is well positioned to help the U.S. replenish Ukrainian arms stockpiles. The segment’s book-to-bill ratio in the second quarter was an impressive 1.4x, and General Dynamics generates sizable free cash flow. Bank of America has a “buy” rating and $305 price target for GD stock, which closed at $219.94.
Leidos Holdings Inc. (LDOS )
Leidos provides technology services and solutions to the defense and intelligence industries and is highly exposed to U.S. government cybersecurity spending. Analyst Mariana Perez Mora recently met with Leidos management, and she says the company’s portfolio of products is well positioned to align with U.S. government priorities. Mora says Leidos’ Dynetics hypersonics business has scored multiple DoD contract wins, and the company’s leading position in hypersonics is relatively secure. Leidos is also already investing in technologies for 5 to 10 years down the road. Bank of America has a “buy” rating and $120 price target for LDOS stock, which closed at $90.98.
KBR provides science, engineering and technology solutions for government and commercial customers. The company is particularly well positioned to capitalize on DoD space and cybersecurity spending. Mora says KBR’s sustainable technology solutions business has exceeded expectations, and demand for sustainable solutions is growing. STS includes hydrogen and ammonia work, plastics recycling, olefins, lithium extraction, green refining technology and sustainable modernization solutions. She says the ramp up of the Homesafe contract will support KBR’s government solutions segment starting in mid-2024, and civil agency modernization efforts will remain a tailwind. Bank of America has a “buy” rating and $75 price target for KBR stock, which closed at $59.14.
CACI International Inc. (CACI )
CACI provides software services for the U.S. government and is another great way for investors to gain exposure to DoD space and cybersecurity spending. Mora says CACI has received three key contract awards – the FocusedFox, Spectral and EITaaS contracts – that will support the company’s growth in the medium term. She says CACI’s product portfolio and impressive order backlog suggest the company is well aligned with U.S. government priorities, and management’s fiscal 2024 guidance forecasts roughly 4.5% revenue growth regardless of the government funding landscape. Bank of America has a “buy” rating and $385 price target for CACI stock, which closed at $315.20.
BWX Technologies Inc. (BWXT )
BWX Technologies supplies U.S. submarines and carriers with nuclear reactors, fuel and associated services. Epstein says BWX is the best way for investors to capitalize on steady growth in U.S. Navy spending and gain diversified exposure to emerging, sustainable end markets such as nuclear energy and nuclear medicine. He says there has been bipartisan support for increasing U.S. naval spending to keep China in check. BWX is also teaming with Lockheed Martin Corp. (LMT ) to develop a spacecraft that uses nuclear thermal propulsion. Bank of America has a “buy” rating and $85 price target for BWXT stock, which closed at $74.08.
Rocket Lab USA Inc. (RKLB )
Rocket Lab is an aerospace and defense company that specializes in launch services, spacecraft engineering and design, components manufacturing, and other spacecraft management solutions. On Sept. 19, Rocket suffered its first failed launch in two years, but Epstein says the failed Capella mission will still be recognized as revenue for Rocket given the company is paid for the attempt, not the successful mission. Moving forward, he says it is unlikely Rocket Labs will hit its 2023 target for successful launches, but it remains a best-in-class space mission investment. Bank of America has a “buy” rating and $14 price target for RKLB stock, which closed at $4.50.
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