In this article, we discuss the 5 undervalued defense and military stocks to buy now. If you want to read our detailed analysis of the defense and military sector, go directly to 10 Undervalued Defense and Military Stocks to Buy Now.
5. CACI International Inc. (NYSE:CACI)
Number of Hedge Fund Holders: 26
PE Ratio (as of March 10): 16.42
CACI International Inc. (NYSE:CACI) ranks next on our list of undervalued defense and military stocks to buy. The Virginia-based firm offers services to the intelligence, defense, and federal civilian sector which include digital solutions, engineering services, enterprise IT, and mission support services. CACI International Inc. (NYSE:CACI) also provides cyber products and solutions to the American intelligence community and the United States Department of Defense.
Out of all the hedge funds tracked by Insider Monkey, 26 were long CACI International Inc. (NYSE:CACI) at the close of the fourth quarter, with combined holdings worth $428.8 million. This shows increasing investor confidence in the company from last quarter, where 20 hedge funds held stakes in CACI International Inc. (NYSE:CACI) with an aggregate value of approximately $395 million. Horizon Asset Management was the top shareholder of CACI International Inc. (NYSE:CACI) in the fourth quarter of 2021, with 463,000 shares valued at $124.73 million.
In late January, Raymond James analyst Brian Gesuale upgraded CACI International Inc. (NYSE:CACI) to ‘Outperform’ from ‘Market Perform’, setting a $300 price target. The analyst believes now is an appealing time to hold CACI stock, with geopolitical instability and improving business fundamentals acting as positive catalysts for the firm.
On January 25, CACI International Inc. (NYSE:CACI) acquired Virginia-based IT firm ID Technologies for $225 million, in a deal which will allow CACI to expand its secure network modernization capabilities. As of March 10, CACI International Inc. (NYSE:CACI) has gained 25.25% in the last year, and 14.99% in the last six months.
4. BWX Technologies Inc. (NYSE:BWXT)
Number of Hedge Fund Holders: 26
PE Ratio (as of March 10): 16.48
BWX Technologies Inc. (NYSE:BWXT) provides nuclear components and products which include precision naval components, nuclear reactors and nuclear fuel, as well as missile launch tubes for United States Navy submarines. Its clients include the United States Department of Energy and the National Nuclear Security Administration’s Naval Nuclear Propulsion Program. The Virginia-based firm also provides commercial nuclear steam generators, fuel handling systems and pressure vessels.
In November last year, Maxim analyst Tate Sullivan gave BWX Technologies Inc. (NYSE:BWXT) a ‘Buy’ rating, noting that the firm’s investor day presentation indicated higher growth potential for the firm beyond 2024, driven by growth in its business of developing nuclear reactors for nuclear-powered aircraft carriers and submarines, as well as its global opportunity in nuclear medicine. BWX Technologies Inc. (NYSE:BWXT) posted an EPS of $0.95 for the fourth quarter, beating estimates by $0.02.
Investors were eager on BWX Technologies Inc. (NYSE:BWXT) in the fourth quarter of 2021, where 26 hedge funds recorded bullish bets on the company shares. In comparison, 17 hedge funds were seen holding positions in BWX Technologies Inc. (NYSE:BWXT) in Q3 2021. Cardinal Capital was the top shareholder in BWX Technologies Inc. (NYSE:BWXT) by the end of December, with 1.65 million shares worth $79.14 million.
Investment firm Upslope Capital Management discussed BWX Technologies Inc. (NYSE:BWXT) in its Q3 2021 investor letter, stating:
“BWX Technologies designs and produces nuclear reactors, components and fuel, primarily for the U.S. Government and Navy (and, more recently, NASA). The company is the sole supplier for its Naval products (~75% of sales), which are used for the power and propulsion of all of the Navy’s aircraft carriers and submarines. With nuclear subs (aka “boomers”) forming the backbone of the “Sea” leg of the Nuclear Triad, BWX plays a vital and sensitive role supporting the national security of the United States. Of course, BWX is exceptionally well-positioned should the saber-rattling vis-à-vis China continue. The recent Aukus security pact, which may eventually benefit BWX, illustrates the urgent and strategic importance of maintaining a modern nuclear-powered sub fleet.
Even if relations with China stabilize (and hopefully they do), BWX shares seem poised to outperform. After four years of essentially going nowhere, the stock currently trades near the low-end of its historical valuation range – just over 13x EBITDA vs. typical range of 13-16x. With a literal monopoly position (albeit against a sole purchaser), BWX has historically generated modest top-line growth with attractive returns on capital (mid-20s). Given the stability of the business and its competitive position, as well as the current geopolitical backdrop, current valuation seems very reasonable.
Importantly, beginning in 2017 BWX embarked on an aggressive capex expansion program, eventually tripling capex as a percentage of sales. In addition to ramping capacity to support Navy growth, BWX spent heavily developing its medical/radioisotope business. While not yet concluded, there is light at the end of the tunnel that should bode well for shares. 2020 appears to have been the capex peak and BWX seems on track for more normalized capex by the end of 2022. This should lead to de-levering the balance sheet (from an already-reasonable 3x gross debt/EBITDA), a potential acceleration in capital returned to shareholders, and/or the prospect of increased M&A.
Lastly, while BWX’s core today is its Naval operations, there is long-term optionality from the other units (~25% of revenue), which are currently focused on Canadian nuclear power (fuel and components), medical, space (NASA) power, and microreactors. BWX faces little competition, if any, across many of these areas. A sizable portion (>50%) of the recent capex program was also invested in a new Mo-99/Tc99 radioisotope (essentially a cleaner, more cost efficient alternative to current products on market – used in cardiology, oncology, neurology, and diagnostics) production line that should lead to an acceleration in growth outside of Naval operations.
Major risk factors for BWX include the possibility of physical accidents, production defects and resulting liabilities, as well as cost pressures due to strained government budgets and/or rising input costs, some leverage (~2x net), and ESG flow headwinds (not fundamental, of course, but a reality).”
3. Leidos Holdings Inc (NYSE:LDOS)
Number of Hedge Fund Holders: 28
PE Ratio (as of March 10): 19.55
Then there’s Leidos Holdings Inc (NYSE:LDOS), an IT firm providing national security solutions and cyberspace systems to a list of clients including the US intelligence community, the Department of Defense, and NASA.
In February, Leidos Holdings Inc (NYSE:LDOS) was awarded the Defense Enclave Services contract by the Defense Information Systems Agency, worth an estimated $11.5 billion. Under this agreement, the firm will unify the DAFAs (Defense Agencies and Field Activities) on a common network architecture, to provide mission services focused on improved security, enhanced user experience, and network reliability.
On March 9, Leidos Holdings Inc (NYSE:LDOS) was awarded a seven-year, $545 million contract to support the National Institute of Allergy and Infectious Diseases (NIAID), by providing a range of biomedical, preclinical and development capabilities and capacity to the organization. In February, Goldman Sachs analyst Gavin Parsons gave Leidos Holdings Inc (NYSE:LDOS) a ‘Buy’ rating and a price target of $103.
Investors were seen piling into Leidos Holdings Inc (NYSE:LDOS) in Q4 2021, with 28 hedge funds bullish on the company shares, as compared to 14 hedge funds a quarter ago. Israel Englander’s Millennium Management was the top shareholder in Leidos Holdings Inc (NYSE:LDOS) by the end of the fourth quarter, with a stake comprising of roughly 362,000 shares worth $32.16 million.
2. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 33
PE Ratio (as of March 10): 10.21
Northrop Grumman Corporation (NYSE:NOC) is a defense giant working on multiple military and aerospace projects with the Pentagon. It is a subcontractor on the F-35 fighter jet, and also manufactures radars, cybersecurity systems, and drones for the American military. The firm is also working on the B-21 stealth bomber, of which the US Air Force plans to buy 80 to 100 units to replace the Boeing B-52. Northrop Grumman Corporation (NYSE:NOC) reported earnings per share of $6.00 for the fourth quarter, beating analysts’ estimates by $0.04.
33 hedge funds held stakes in Northrop Grumman Corporation (NYSE:NOC) at the close of the fourth quarter, with a combined value of $561 million. This shows a positive trend from last quarter where 29 hedge funds held positions worth $910 million in the firm. Yacktman Asset Management was the leading shareholder of Northrop Grumman Corporation (NYSE:NOC) in Q4 2021, holding roughly 442,000 shares worth $171.2 million.
On March 7, analyst Matthew Akers at Wells Fargo kept an ‘Equal Weight’ rating on Northrop Grumman Corporation (NYSE:NOC) shares whilst raising the price target to $472 from $390. Akers believes that the stock’s valuation would likely remain on the higher side for some time to come owning to elevated geopolitical tensions. As of March 10, Northrop Grumman Corporation (NYSE:NOC) has seen its share price gain 48.18% in the last 12 months, and 25.44% in the last 6 months.
1. Lockheed Martin Corporation (NYSE:LMT)
Number of Hedge Fund Holders: 42
PE Ratio (as of March 10): 19.52
Lockheed Martin Corporation (NYSE:LMT) ranks first on our list of undervalued defense stocks to buy. 42 hedge funds reported owning shares in the firm as of Q4 2021, with holdings worth $976.1 million. D E Shaw held the biggest stake in Lockheed Martin Corporation (NYSE:LMT) at the close of the fourth quarter, worth $171.4 million and comprising of 482,000 shares. This represented a 59% increase in holding from the previous quarter.
With a market cap of $122.2 billion, Lockheed Martin Corporation (NYSE:LMT) is one of the biggest defense firms in the world, having served the US government for decades. It produces fighter jets, unmanned drones, military and commercial helicopters, air and missile defense systems, and other services related to national security systems. The firm reported earnings per share of $7.24 for the fourth quarter, beating estimates by $0.10. Revenue for the Q4 stood at $17.73 billion, beating analysts’ forecasts by $71.71 million and signaling a 4.09% increase from the year-ago period.
On February 28, Wolfe Research analyst Michael Maugeri upgraded Lockheed Martin Corporation (NYSE:LMT) to ‘Outperform’ from ‘Peer Perform’ and set a $467 price target, noting that stocks in the defense sector would face significant upside in the coming months as the Russian invasion of Ukraine increases military spending around the world. He likes Lockheed’s outsized exposure in the global market, and strong demand for its aeronautics products.
Here is what RiverPark Advisors, LLC had to say about Lockheed Martin Corporation (NYSE:LMT) in its Q4 2020 investor letter:
“Despite better-than-expected third quarter results, LMT shares were weak for the quarter as defense spending is expected to be flat for the coming year. With a record $150 billion backlog and almost 30% of its revenue coming from building F-35 aircraft with deliveries forecast to reach 180 per year in 4-5 years (3Q’s revenue upside was from the F-35), we believe LMT should grow at a higher rate than overall defense budget growth and Street expectations over the next several years. Further, strategic acquisitions (LMT acquired AJRD for $4 billion in late December), debt pay down, a 3% dividend yield, and continued share buybacks from $6 billion per year of free cash flow should lead to even greater shareholder returns.”
You can also take a look at 10 Best Communication Equipment Stocks To Buy and 10 Best Solar Energy Stocks To Buy Now.
