While the three companies are expanding their international sales, they are also betting on increased revenues from commercial sources, both domestic and international. Latest examples include Lockheed Martin’s entry into providing liquified natural gas tanks for storage and transportation to the oil and gas industry. General Dynamics Corporation (NYSE:GD) is increasing delivery of the Gulfstream aircraft, and Raytheon has taken a pioneering role in public safety communication by leading the transitioning from LMR (land-mobile radio) to the LTE (long-term evolution) standard.
Share buybacks
Due to their cash generating abilities, all three companies have significant amount of cash on their balance sheets and return cash in the form of dividends and share buybacks. During the last two quarters, Lockheed Martin, General Dynamics Corporation (NYSE:GD), and Raytheon bought back shares worth $926 million, $585, and $450 million, respectively, and had cash reserves as of the last quarter end of $2.9 billion, $3.8 billion, and $3.5 billion, respectively. All three companies have significant amounts left on their share buyback authorization plans, and buyback activity for the second half of 2013 should remain strong.
Conclusion
Lockheed Martin, General Dynamics, and Raytheon trade at 2013 estimated price-to-earnings ratios of 12.9, 12.6, and 13.1, respectively. This is favorable to a 2013 estimated price-to-earnings ratio for the S&P 500 of 15.6. Also, their dividend yields (ranging from 2.6% to 3.8%) are more attractive than that of the average S&P 500 member. General Dynamics has the largest exposure to the army (the part of DoD seeing the largest budget cuts) followed by Raytheon and Lockheed. On the other hand, Raytheon has the largest portion of its sales from international sources and it has the leanest workforce. This makes Raytheon a slightly better investment, followed by Lockheed Martin and General Dynamics.
The U.S. as well as many other countries are likely to continue spending large portions of their budgets on defense. While sales growth might be slowing or reversing due to sequestration, the three companies discussed above have many levers that they can pull to offset this trend. The strong share price performance of Lockheed Martin, General Dynamics and Raytheon should continue due to their ability to reduce labor costs, streamline operations and increase international and commercial sales and their solid balance sheets, which allows for share repurchases and competitive dividends.
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The article Three Military Giants Poised to Overcome Sequestration originally appeared on Fool.com and is written by Delian Naydenov.
Delian Naydenov has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics, Lockheed Martin, and Raytheon Company. Delian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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