The past year has been a mixed one for leading firms in the defense and aerospace industries. Defense firms have been subject to significant budget cutbacks in 2011 while aerospace has been caught with global growth headwinds. The coming year could see much less turbulence. Below is an overview of the valuations and business outlooks for the coming year on important firms to watch in the industry.
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With a market capitalization of $25 billion, Lockheed Martin (NYSE:LMT) is among the largest firms in the industry. The investment appeal comes from a current dividend yield of 5.2% and forward P/E of about 10. This qualifies as a low valuation given the firm's size and leadership position in the space. Primary products for Lockheed Martin include combat aircraft, such as the F-35, F-22 and F-16 fighters, as well as IT systems for defense, intelligence and space systems. Analysts project modest sales growth of 2% and total sales of nearly $47 billion for all of 2011, which is about where they are expected to stay for 2012. Earnings for the coming year are currently pegged at $7.84 per share. (To know more about EPS, read How To Evaluate The Quality Of EPS.)
Raytheon (NYSE:RTN) sports a current market cap of almost $16 billion and also has an above-average dividend yield of 3.8%. Its focus is on systems in the vital command, control, communications and intelligence systems (C3I) realms. Examples of this include the Patriot Air & Missile Defense System, anti-submarine detection systems and missile guidance systems. For all of 2011 and 2012, analysts project flat sales of roughly $25 billion. Earnings for 2011 are pegged at $5.04 per share and $5.22 per share for annual growth of only about 3%. At the current share price, the forward P/E is only 9.
Rockwell Collins (NYSE:COL) has a current market cap of just over $8 billion and its dividend yield is only 1.8%. Rockwell's focus is on communications and aviation electronics for both the military and commercial customers. Products are used for transmitting information in "rugged" environments that can be found during combat and also include cockpit display products as well as satellite communication systems. Analysts project 2011 sales growth of about 3%, total sales of nearly $5 billion, 5% growth in 2012 for total sales of $5.2 billion. Projected earnings growth for 2011 is above 13% for a forward P/E at 12.
Honeywell International (NYSE:HON) is not a pure play aerospace firm but does operate a sizeable aerospace unit that sells turbine propulsion engines, power units and systems, avionics systems such as flight safety systems, and aircraft lighting for inside and outside airplanes. Last year, aerospace accounted for roughly one-third of total sales of $33.4 billion and close to 40% of total profits of $4.6 billion. For all of 2011, analysts project healthy sales growth of 10%, total sales of almost $37 billion and nearly 6% growth in 2012 for sales close to $39 billion. Projected earnings growth is pegged at above 50% for total earnings of $4.03 per share in 2011, with another 10% growth for 2012. Honeywell's market cap is above $40 billion; it sports a dividend yield of 2.8% and a forward P/E of 12.
The Boeing (NYSE:BA) is the largest aerospace firm and has a current market cap in excess of $53 billion. Its dividend yield is 2.5% and along with Airbus it leads the world in manufacturing commercial airplanes. It also makes military aircraft and network and space systems. Each segment accounts for roughly half of total annual sales, which last year came in at $64.3 billion. Analysts expect that to grow 7% to over $68 billion for all of 2011 and another 14% to $78.5 billion in 2012 where profits should hit $5 per share. The forward P/E is somewhat lofty at 15.
The Bottom Line
Given the pressure in U.S. defense budget spending, the defense firms trade for much lower earnings multiples than those more focused on aerospace businesses. Understandably, the valuations are richer for the aerospace folks, leaving defense names offering a more compelling mix of value and income potential. Several, including Lockheed and Rockwell, offer some modest profit growth potential. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)
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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.