Redburn sees U.S. defense buildup driving Lockheed, Northrop growth

Investing.com -- Rothschild & Co Redburn launched coverage of four U.S. defense companies on Tuesday, rating Lockheed Martin, Northrop Grumman and Kratos "buy" and AeroVironment "neutral", citing a proposed $1.5 trillion U.S. military budget for fiscal 2027.

The Pentagon’s request is about 49% higher than the prior year, or 34% above the base discretionary budget request, Redburn said. If fully approved, it would raise U.S. military spending to 5% of GDP from 3.5%.

The budget proposal faces uncertainty because it relies on both the annual base budget and a reconciliation request.

The fiscal 2027 National Defense Authorization Act has yet to pass, while the government is operating under a continuing resolution through at least December, which Redburn expects to be extended.

Redburn set a $650 price target on Lockheed Martin, implying about 29% upside, citing expected demand to replenish munitions stockpiles.

It expects mid-teens growth at the company’s Missiles and Fires Control segment and forecasts annual revenue and earnings-per-share growth of 5.8% and 9.2%, respectively, over fiscal 2026-30.

For Northrop Grumman, Redburn set a $680 price target, implying about 41% upside, citing revenue growth and margin expansion from its B-21 and Sentinel programmes.

It forecasts annual revenue and earnings-per-share growth of 6.8% and 8.3% over fiscal 2026-30.

Redburn set a $70 price target on Kratos, saying the company is positioned to benefit from the Pentagon’s push to strengthen the U.S. defense industrial base.

It expects annual revenue growth of 18% and adjusted core earnings growth of 25.3% over fiscal 2026-30.

The brokerage set a $165 price target on AeroVironment, implying about 17% upside, but rated the stock "neutral" because it sees better near-term upside and lower risk elsewhere in its coverage.

It expects fiscal 2027 to be a transition year, with flat earnings and negative free cash flow due to a large capital programme, before an improvement in fiscal 2028.

Redburn said replenishing interceptor missile stocks is another demand driver. Citing the Center for Strategic and International Studies, it said the U.S. inventory of PAC-3 interceptors may have fallen to between 759 and 827 by July 27 from 2,330 before the Iran conflict.

U.S. aerospace and defense stocks have underperformed the S&P 500 by about 25% over the past six months, Redburn said.

It expects volatility and a downward trading bias ahead of the midterm elections, with recent polling pointing to a greater chance of Democrats controlling both chambers of Congress.

That could create uncertainty around reconciliation or supplemental defense spending requests.

Redburn expects Lockheed Martin and Northrop Grumman to pause share buybacks in the near term and resume them in fiscal 2028.

Original Article

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