Global defense spending hit a record high of $2.24 trillion in 2022. The Russia-Ukraine conflict and East Asia tensions are influencing increases in military expenditure. These geopolitical dynamics spell a favorable operating environment for the best defense stocks.
The war in Ukraine has already depleted arms inventories for the U.S. and European nations. As we advance, these defense contractors will enjoy sustained demand. Thus, replacing missiles and other defense systems will support demand from now on.
Also, the Russia-Ukraine war has highlighted the vulnerability of European nations and other U.S. allies. After decades of defense spending stagnation, several Western and Central European states significantly boosted their defense spending in 2022.
Meanwhile, countries in other regions are increasing their defense budgets to enhance preparedness. For instance, Japan is increasing its defense spending due to rising threats from China and North Korea.
These three best defense stocks are in a prime position to benefit from increasing defense budgets. They supply critical defense systems and services that will be in high demand in this volatile geopolitical landscape.
Lockheed Martin (LMT)
Lockheed Martin’s (NYSE:LMT), a Maryland-based defense giant, is a critical defense supplier for the U.S. and its allies. The company develops and manufactures advanced military aircraft. In addition, it provides air-to-ground precision strike weapon systems, tactical missiles and air and missile defense systems.
Lockheed Martin’s F-35 program will be a key growth driver. In 2022, the F-35 program accounted for 27% of total sales and 66% of the Aeronautics segment’s net sales. Given the rising U.S.-China tensions, the U.S. and its allies are banking on F35 fighter jets to bolster their defenses.
There are reasons for optimism after the debt ceiling deal met President Joe Biden’s $886 billion request for fiscal year 2024. As a result, the F-35 will receive funding to produce 83 F-35 aircraft. Besides, there is increasing interest from allies. For instance, Israel recently approved the purchase of 25 F-35 jets.
As orders increase, revenue growth is accelerating. In the second quarter of FY2023, the aeronautics segment grew sales 17% year-over-year. The increase was mainly due to a rise in production contracts.
Looking at the Missiles and Fire Control segment, sales were flat. While the year-over-year growth was disappointing, the backlog trend was positive. The segment recorded a backlog increase of $5.3 billion to close the quarter at $34 billion.
With a record backlog and growing revenues, the company is in a strong position to return capital to shareholders. It has a strong record of shareholder returns, having repurchased 21% of its outstanding shares in the last 10 years. Additionally, it has increased its dividend for 20 consecutive years.
RTX Corporation (RTX)
Considering that RTX Corporation (NYSE:RTX) is near 52-week lows, it might be an opportunity to buy one of the best defense stocks. After announcing its second-quarter results, the stock declined by over 10%. The negative reaction was triggered by an issue with its Pratt & Whitney engines.
Reuters reported that RTX had discovered a defect in 1,200 engines. Microscopic contaminants in the powdered metal in high-pressure turbine discs could cause micro-cracks. As a result, the affected engines must be grounded for inspection over the next year. This was a setback for the company’s ambition to conquer the jet engine market.
But looking at the rest of the second quarter report, the results were impressive. Sales were up 12% YOY and 13% on an organic basis. The Collins Aerospace, Pratt & Whitney and Raytheon Missiles & Defense segments reported 17%, 15% and 12% YOY growth rates, respectively. Meanwhile, the total backlog was a healthy $185 billion — $112 billion commercial and $73 billion defense.
Net income from continuing operations was 1.3 billion, a 2% YOY increase. Additionally, adjusted EPS grew 11% YOY to $1.29. The company also repurchased $596 million of RTX shares in the quarter.
Management highlighted the strong momentum and raised their outlook. “Based on the strong performance year-to-date and strong end-markets, we are raising our full year sales outlook and tightening our adjusted EPS* outlook,” said CEO Greg Hayes.
For FY2023, management expects adjusted EPS of $4.95 – $5.05. Considering a midpoint EPS of 5, the stock trades at 16 times forward price-to-earnings. Buy the world’s largest aerospace and defense company at these bargain prices.
CACI International (CACI)
CACI International (NYSE:CACI) offers specialized technology services and consulting to the defense and intelligence industry. It is a beneficiary of the modernization efforts in the U.S. military and intelligence. Moreover, it will profit from the increased cyber warfare as we go ahead.
The company provides digital solutions that modernize federal agencies and their IT. The Engineering Services segment enhances and hardens national technology systems to defend against malicious actors. Its C4ISR, Cyber & Space solutions provide electromagnetic spectrum advantage and deliver precision effects to protect federal agencies against national security threats.
CACI generates a significant portion of revenues from the federal government. In fiscal 2023, federal government contracts made up 94.8% of total revenues. Over the same period, contracts with agencies of the Department of Defense represented 71.9% of total revenues.
Over the past decade, revenues have been steadily increasing, given the growth in defense spending. This growth will likely continue due to the critical nature of CACI’s services to the U.S. government.
The company has secured key defense contracts from the U.S. government. For instance, it won a $5.7 billion Air Force Enterprise IT contract in June to modernize and transform Airforce IT services. And in August, it bagged another $2.7 billion contract from the National Security Agency. These awards highlight why CACI is one of the best defense stocks to buy.
In terms of valuations, the stock is reasonably valued. For the full year ending June 30, 2023, it earned an adjusted diluted EPS of $18.83. Thus, as of this writing, it trades at 17 times trailing earnings. Given the stability of its defense business and expected secular defense spending, CACI stock is a bargain.
On the date of publication, Charles Munyi 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.