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The Best Buys In Defense: Lockheed Martin, Raytheon Preferred To General Dynamics

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The Best Buys In Defense: Lockheed Martin, Raytheon Preferred To General Dynamics
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Defense stocks have been on a tear in recent years, but there may be even more upside ahead. On Wednesday, Morgan Stanley analyst Rajeev Lalwani said global threats aren’t going away anytime soon, and defense budgets keep expanding. Headlines about North Korea, Russia and the Middle East will likely continue to fuel demand for defense technology. Defense can also be a solid play during times of economic weakness as well due to its unique government-driven revenue profile.

In addition, U.S. defense spending is only likely to increase if politicians in Washington can get on the same page about key issues.

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“We foresee several beneficial opportunities for Defense via successful US policy actions on tax reform, infrastructure spend, and/or further military budget expansion contributing to significant upside in our Bull case of ~50% that could be more appreciated,” Lalwani wrote.

Related Link: Breaking Down Trump's 'Skinny Budget'

Morgan Stanley’s top two defense picks are Overweight-rated Lockheed Martin Corporation (NYSE: LMT) and Raytheon Company (NYSE: RTN). Lalwani said Lockheed Martin has a well-balanced business with clear long-term visibility and the potential for 15-percent compound annual revenue growth over the next five years. Raytheon has a leading global presence in high-demand markets such as missile defense, and the company has a pristine balance sheet.

Morgan Stanley is less constructive on Equal-Weight-rated Northrop Grumman Corporation (NYSE: NOC) due to its lackluster free cash flow yields and margin growth.

Finally, the firm is Underweight General Dynamics Corporation (NYSE: GD) and sees the company’s margins at risk due to increasing Gulfstream competition in the next decade.

Morgan Stanley has a $342 price target for Lockheed Martin, a $188 price target for Raytheon, a $279 price target for Northrop Grumman and a $185 price target for General Dynamics.

Latest Ratings for RTN

DateFirmActionFromTo
Aug 2017BuckinghamMaintainsBuy
Aug 2017Morgan StanleyInitiates Coverage OnOverweight
Aug 2017Argus ResearchMaintainsBuy

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