Defense Firms Set To Post Higher Sales, McCarthy’s Election Clouds Outlook

By Nathan Gomes

(Reuters) – Defense companies are expected to post higher fourth-quarter sales, according to analysts, bolstered by easing supply chain bottlenecks and increased defense outlays as the Pentagon and its allies step up spending to aid Ukraine in its conflict against Russia.

However, Republican Kevin McCarthy’s election as the speaker of the U.S. House of Representatives and his promise to curb spending have clouded the near-term outlook for weapon makers, analysts have said.

A slew of analysts has cut price targets on defense contractors since the beginning of the year, with some flagging a risk to defense outlay after House Republicans won a thin majority in the mid-term elections.

Goldman Sachs’ Noah Poponak in a note about the defense budget over the past few years said, “mathematically maintaining a high growth rate is hard, and declining slightly is easy”.

“U.S. fiscal policy could increasingly become a downward pressure given the significant increase in the deficit post-pandemic and recent political developments with increased pressure,” Poponak said, adding that “there are geopolitical upward pressures” as well.

THE CONTEXT Defense stocks have benefited from higher outlay on weapons by the United States and its allies due to the Ukraine war, but companies have struggled with supply snags, higher costs and labor shortages.

A cut to the defense budget would negatively impact prime defense contractors such as Lockheed Martin Corp, Raytheon Technologies Corp, General Dynamics Corp and Northrop Grumman Corp, which rely on the government for a huge chunk of their revenue.

“Defense Q4’s look solid but DoD budget debate overhang” is a headwind, Cowen analyst Cai von Rumohr said.

Lockheed and Raytheon kick off fourth-quarter earnings on Jan. 24, with General Dynamics and Northrop set to report later in the week.

THE FUNDAMENTALS

** Lockheed is set to report quarterly revenue of $18.27 billion and a profit of $7.37 per share, according to Refinitiv data.

** Raytheon is expected to post quarterly revenue of $18.15 billion and a profit of 92 cents a share.

** General Dynamics is estimated to report quarterly revenue of $10.69 billion and a profit of $3.55 per share.

** Northrop is expected to report quarterly revenue of $9.66 billion and a profit of $6.58 per share.

WALL STREET SENTIMENT

** Analysts’ average rating on Lockheed shares is “Hold”. Median 12-month price target is $495.

** Analysts’ average rating on Raytheon shares is “Buy”. Median 12-month price target is $107.

** Analysts’ average rating on General Dynamics shares is “Buy”. Median 12-month price target is $285.

** Analysts’ average rating on Northrop shares is “Buy”. Median 12-month price target is $566.

(Reporting by Nathan Gomes in Bengaluru, Additonal reporting by Pratyush Thakur; Editing by Vinay Dwivedi)