
3 Defense Stocks Poised to Win Big From Washington's Dysfunction
NEW YORK (TheStreet) -- Observing the political farce in Washington, D.C., as GOP lawmakers seek to dragoon any representative willing to take on the thankless task of Speaker of the House, I'm reminded of the famous quote of New York Mets manager Casey Stengel: "Can't anyone here play this game?"
But therein lies investor opportunity, especially among undervalued defense stocks.
Actually, when it comes to the salons of Capitol Hill, the obscure dance-drama rituals of Japanese Kabuki theater are a more apt metaphor than baseball. At least baseball has clear rules and impartial umpires. Leadership crises, debt ceiling deadlines, shutdown threats -- the political dysfunction in the nation's capital is not only wearying voters but clobbering stocks that rely on government.
Sure, as a taxpayer I'm enraged. But as an investor, I'm excited. Three defense-related stocks -- Boeing (BA) - Get Report , Honeywell (HON) - Get Report and Raytheon (RTN) - Get Report continue to boast inherent long-term strengths and are great buys to boot.
The first two stocks, Boeing and Honeywell, benefit from continued turmoil and tensions in regional hot spots around the world. In particular, China is making aggressive territorial claims in the South China Sea that its neighbors find threatening, prompting these Asian countries to boost purchases of U.S.-made weapons. Most recently, on October 15, U.S. Navy officials denied that American vessels sailing through international waters in the South China Sea weren't provocative, whereas China did not agree.
According to analysts' consensus, the global military aircraft market was valued at US$38 billion in 2011; it's projected to exceed US$71.9 billion by 2021, for a compound annual growth rate of 6.58% during the forecast period. The fastest growth will come from emerging markets where regional woes tend to be the most acute -- a trend that won't be slowed by the budgetary vagaries in Washington.
With a market cap of $104.5 billion, Boeing is the world's largest maker of commercial and military aircraft, as measured by revenue. In addition to making popular airliners for the commercial sector, the company is a major developer of combat jets and helicopters, such as the storied AH-64 Apache.
Boeing's F/A-18 E/F Super Hornet is a staple of the U.S. Navy; the company's F-15E Strike Eagle is flown by the U.S. Air Force. Both are also among the most popular U.S. aerospace exports, helping drive reliable sales and profits at Boeing during the cyclical ups-and-downs of the civilian market.
A major avionics and electronics supplier for the Super Hornet is Honeywell. With headquarters in Morris Township, N.J., and a market cap of $80.2 billion, Honeywell is widely diversified, offering high-technology products in the aerospace, automotive, chemicals, health care, housing, and agricultural sectors.
Propelling growth for the company is the aerospace sector, where it provides electric power systems, avionics and a variety of other products and services.
Raytheon, meanwhile, is getting a lift from the global boom in unmanned aerial vehicles (UAVs). One of the fastest-growing areas in the defense sector is UAVs, which continue to receive budgetary increases from Pentagon planners. The U.S. military is transforming all armed services to embrace 21st century tactics and technologies, while simultaneously shedding anachronistic, Cold War weapons systems. Budgetary wherewithal is being siphoned away from the "boondoggles" of the past century in favor of high tech weaponry such as drones. UAVs are already seeing widespread action in combat zones in the Middle East and they're coveted by developing countries, especially in Asia, that are wary of their neighbors and of terrorism.
Here's what I like about Raytheon: the company doesn't make UAV fuselages, which are becoming low-margin and commoditized, but rather the ultra-sophisticated sensors that guide these pilotless aircraft. Through its decades-long legacy as a missile maker, Raytheon is a leader in the profitable manufacture of sensors.
All three companies boast robust balance sheets, growing revenue and earnings, and large order backlogs. But here's the sweetener: they all sport attractive valuations in light of their growth prospects. Boeing's trailing 12-month price-to-earnings ratio is 18; Honeywell's 17, and Raytheon's 15, compared to roughly 19 for the aerospace/defense industry as a whole.
Regardless of what happens in Washington, history shows that the defense industry always gets its way. Once the dust settles around the squabbling Beltway and investors lose their jitters over government-related stocks, this trio of defense leaders will soar.
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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.








