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Deutsche Bank: We Still Like These Defense Stocks

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In a report issued Thursday, analysts at Deutsche Bank provided updated commentary on the defense industry, following their annual survey of program managers, which offers perspectives from inside the Department of Defense (DoD).

The Survey

“With the pinch of the Budget Control Act slated to ease, and both the White House and Congress bickering about how to spend more money on defense and not whether to spend more money on defense,” the specialists at Deutsche Bank explain. They continue to see the sector in the early stages of a shy, but positive budget inflection. 

Related Link: Deutsche Bank Bullish On Defense Stocks After 'Positive Inflection' In U.S. Defense Spending

According to the survey, 30 percent of respondents see an improvement in budget backdrop when compared to what happened 6 months ago. This means they are not as positive as in 2014, but still much more constructive than they were in the 2011-2013 period.

Moreover, for the first time in years, “some program managers are signing up to a ‘slight growth’ budgetary outlook for the next few years.”

The Picks

Following the survey, Deutsche Bank’s picks in the defense industry remain General Dynamics Corporation (NYSE: GD), Northrop Grumman Corporation (NYSE: NOC), L-3 Communications Holdings, Inc. (NYSE: LLL), and Huntington Ingalls Industries Inc (NYSE: HII).

Between January of 2011 and March of 2013, defense stocks underperformed the market by 11 percent. However, this trend was reverted in March 2013, when the sequestration started. Since then, defense stocks have outperformed the S&P 500 index by 80 percent.

Notwithstanding, 2015 was not a great year for defense names.

Since the beginning of the second quarter of the year, these companies have underperformed the market by 7 percent, “as 1Q results weren’t enough to keep ‘hide-out’ investors interested, the bond proxy trade lost steam as rates ticked up, and a seemingly continuation of the budgetary dysfunction in DC (despite glimmers of hope earlier in the year).”

The analysts see that relative pull back as an opportunity, for they see these as “the early days of a positive budgetary inflection.” Thus, they reiterate their positive view on the four aforementioned companies.

Northrop Grumman has "both the greatest proportional exposure to improvement in US defense spending and the largest potential catalyst," analysts concluded, referring to the company's long-range strike bomber.

Latest Ratings for GD

Oct 2016BairdInitiates Coverage onOutperform
Sep 2016CitigroupMaintainsBuy
Sep 2016CitigroupMaintainsBuy

View More Analyst Ratings for GD
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Posted-In: Department of Defense Deutsche Bank DoDAnalyst Color Long Ideas Reiteration Analyst Ratings Trading Ideas


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