Global military spending for 2023 touched record highs of $2.44 trillion. On a year-on-year basis, defense spending increased by 6.8%. That does not come as a surprise, as there are multiple points of geopolitical friction globally. It’s also likely that defense spending will continue to increase at a healthy pace through the decade. From an investment perspective, it’s a good opportunity to consider exposure to some of the best defense stock picks.
If we look at some top defense companies, the order backlog has been swelling. Further, companies are investing in next-generation defense technology. A swelling backlog implies clear revenue and cash flow visibility. Investment in R&D will ensure that growth remains healthy as new technology replaces the existing in the coming years.
Therefore, the overall outlook for the defense sector is positive. Even with macroeconomic headwinds, I don’t see a slowdown in defense spending. As a matter of fact, global defense spending increased even during the pandemic years.
With this overview, let’s discuss three defense stock picks poised to surge higher on the back of potential growth acceleration.
Lockheed Martin (LMT)
Lockheed Martin (NYSE:LMT) is my top pick from the defense sector. After remaining sideways for the last 12 months, LMT stock trades at an attractive forward price-earnings ratio of 17.9. Further, the stock offers a dividend yield of 2.73%. With business progress remaining positive, I am bullish on a strong breakout for LMT stock.
As of Q1 2024, Lockheed reported a strong order backlog of $159 billion. That provides clear revenue and cash flow visibility. For the current year, Lockheed has guided for free cash flow of $6.2 billion. FCF will likely continue to swell in the coming years on the back of healthy order intake.
An important point to note is that Lockheed is investing in next-generation defense technology. That includes hypersonics and next-generation interceptors, among others. Investment in research and development will ensure that Lockheed is ahead of the curve. Further, with expanding sales to allies, the addressable market is significant.
Leonardo DRS (DRS)
Among the emerging defense stocks, Leonardo DRS (NASDAQ:DRS) is worth considering for multibagger returns. DRS stock has trended higher by 35% in the last 12 months. However, the growth stock remains attractive at a forward price-earnings ratio of 26.8. With a swelling order backlog, I expect growth to accelerate in the coming years.
As an overview, Leonardo DRS is a provider of defense technologies. For the last financial year, the company clocked revenue and EBITDA of $3 billion and $378 million respectively. It’s worth noting that as of Q1 2024, Leonardo reported an order backlog of $7.8 billion. On a year-on-year basis, the backlog swelled by 84%. If the order intake remains robust, there is a strong case for a healthy upside in EBITDA and cash flows.
I must add here that Leonardo has been consistently investing in R&D. Last month, the company won the 2024 Herschel Award for the “development of a groundbreaking cooled infrared sensor that unlocks the ability for advanced military and scientific capabilities.”
RTX (RTX)
RTX (NYSE:RTX) has witnessed a healthy rally of 20% for year-to-date. However, the stock remains attractively valued at a forward price-earnings ratio of 19.3. Therefore, I expect further upside for this 2.49% dividend yield defense stock.
For Q1 2024, RTX reported healthy sales growth of 12% on a year-on-year basis to $19.3 billion. For the same period, the company reported a healthy order backlog of $202 billion. That included a $125 billion backlog from the commercial segment and $77 billion from defense. A robust backlog provides clear revenue visibility.
An important point to note is that the order intake for Q1 2024 was $25 billion. If that pace of intake sustains, organic sales growth will likely remain robust. I must add that RTX has guided for free cash flow of $5.7 billion for the year. That provides ample flexibility to invest in operational modernization and technological innovation.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
