3 Stocks to Get a Huge Boost from Obama's Military Pivot to Asia
President Obama this week embarked on a five-day swing through Asia, to underscore America's commitment to the security of allies in the region who feel threatened by China's increasingly aggressive territorial claims.
Many of these emerging countries are historical antagonists of China and they're especially wary of the Middle Kingdom's machinations in the disputed and resource-rich waters of the South China Sea.
As the president in coming days makes assurances (and doles out hundreds of millions of dollars in military assistance), what isn't widely covered in the press are the companies that stand to profit the most from the strategic pivot of the United States toward Asia: aerospace manufacturers Boeing (BA) - Get Report , Lockheed Martin (LMT) - Get Report and Honeywell (HON) - Get Report . All three companies are in line to reap multi-year riches from strengthened military alliances between the U.S. and the region, but they also trade at attractive valuations in the context of their five-year growth potential.
data by
Now's the time to buy these three aerospace/defense stocks, while deals are getting inked and new orders start to fill their pipelines. Boeing and Lockheed Martin make combat jets popular with the air forces and navies in the area; Honeywell makes the avionics for many of these aircraft models.
All three companies report strong and growing order backlogs, consistently rising earnings and revenue and robust balance sheets with plenty of cash on hand.
Their trailing 12-month price-to-earnings (P/E) ratios are 19.73 for Lockheed, 18.39 for Boeing, and 17.92 for Honeywell, compared to the trailing P/E of 19.57 for the aerospace/defense industry.
Their five-year price-to-earnings growth (PEG) ratios are 2.73 for Lockheed, 1.64 for Boeing, 1.87 for Honeywell, and 1.88 for the industry.
The upshot: all three stocks are reasonably priced, as rising tensions in regional "hot spots" such as the South China Sea funnel more contracts their way.
In light of the president's military-oriented tour of Asia, here's a breakdown of how demand from three major customers in the region will boost the revenue and earnings of Boeing, Lockheed Martin and Honeywell:
Taiwan: Eye on China
The Republic of China (Taiwan) Air Force is eager to modernize its fleet of 145 F-16s, manufactured by Lockheed Martin.
The U.S. has offered Taiwan a $4.2 billion upgrade of its aging F-16 A/B fighter fleet. Taiwan views the F-16 upgrade program as crucial to maintaining its air defenses, as its long-time rival China greatly boosts its own air force.
Although Taiwan has nearly 400 combat aircraft in service, many of them aren't operationally fit. At the same time, China has enhanced the quantity and quality of its weaponry arrayed against Taiwan, making it increasingly difficult for Taiwan to prevent the Chinese from gaining air superiority in the area.
Taiwan's fighter aircraft fleet has remained roughly the same since the late 1990s, whereas the Chinese have modernized its air force.
Taiwan's aging fighters also are encountering maintenance and spare parts shortfalls; the U.S. F-16 A/B upgrade program should help mitigate those problems and provide a steady stream of business for both Lockheed Martin and the company that makes the electronics for the cockpit, Honeywell.
Malaysia: Asian Tug-of-War
The Royal Malaysian Air Force largely focuses on defense of sovereign territory but it is increasingly conducting out-of-area operations, as tensions among its neighbors heat up and piracy becomes a worsening problem.
The air force is frequently dispatched to the Gulf of Aden, to deal with Somalian pirates. Malaysia also has expressed concerns that Muslim unrest in the Philippines and Thailand could spill over its borders.
The South China Sea is the center of a tug-of-war among Malaysia, China, Indonesia, and Singapore. The sea is a major import-export avenue and also is rich in oil and gas deposits; rising nations in the region are vying for access to this vital waterway.
The Royal Malaysian Air Force has a deal with Boeing to upgrade its fleet of 8 BA-made Hornets. The total value, if all options are exercised, could be as high as $1.5 billion.
As prime contractors on the Hornet, Boeing and Honeywell directly benefit from Malaysia's defense needs.
Indonesia: American Proxy
Indonesia's booming and tech-savvy economy makes it a key player in Southeast Asia and an increasing recipient of Uncle Sam's military largess.
Fighter aircraft modernization and closer ties with the West are twin priorities for Indonesia. The air force's primary mission is to provide a counterweight to China's growing dominance of the region's skies.
Accordingly, this nation archipelago has agreed to a deal with the U.S. for the delivery of 24 Lockheed Martin F-16 A/B aircraft.
The F-16 A/B procurement is worth at least $750 million and is the linchpin of a U.S. strategy to wield the Indonesian Air Force as an American proxy.
These three defense stocks are well-valued buys now. For a full list of hot stocks now trading at bargain prices, take a look at this free report. The stocks on this list are set to soar in 2016, but they're affordable now. Click here for more details.
John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.