Goldman Sachs analyst Noah Poponak downgraded Lockheed Martin Corp LMT to Sell from Neutral with a price target of $332, down from $388.
LMT is the Defense bellwether, the most significant prime with 75% exposure to U.S. Defense spend, making it highly levered to the industry dynamics.
The defense budget has grown significantly to an all-time high level, and with a significant cumulative U.S. government debt, focus on slowing spending growth or reducing it outright could return in 2023.
LMT is highly diversified across the defense end-market, which often grows directly proportional to the budget.
However, LMT's program-specific headwinds like F-35, Blackhawk, OPIR, and tough compares in missile and missile defense creates a distinctive growth headwind on top of the overall budget pressures the analyst believe could materialize.
Poponak downgraded Northrop Grumman Corp NOC from Neutral to Sell and lowered the price target from $440 to $375.
Northrop Grumman is a Defense prime with an 85% U.S. Defense mix.
While NOC has won two large, early-stage Defense programs that could allow it to outgrow the budget over the next few years (B-21 and GBSD), it is susceptible to any budget pressures should they mount.
NOC faces margin pressure from cost input inflation and free cash flow pressure from the R&D cash tax input. EPS and FCF estimates for NOC have been consistently decreasing recently.
NOC is also the most expensive Defense prime the analyst covers.
Poponak downgraded Raytheon Technologies Corp RTX from Buy to Neutral and lowered the price target from $115 to $105.
RTX combines solid commercial aerospace parts and engine business with Raytheon Defense.
The analyst still favors the commercial aerospace business and sees a meaningful upside to normalized revenue and margins as the global air travel and new aircraft build rate recovery continues.
Commercial aero is up to 2/3 of the portfolio in a typical environment. However, Defense is a substantial part of the mix, and the company's growth rate and valuation will be dictated mainly by conditions in the defense end-market.
RTX is relatively well positioned within the defense end-market; but has seen recent industry outlay pace and supply chain challenges, which could continue into 2023 and put the 2025 targets at risk in the segments.
Price Actions: LMT shares traded lower by 2.2% at $451.60 on the last check Friday. NOC shares traded lower by 3.93% at $468.27, and RTX shares traded lower by 2.24% at $98.44.
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