
With Spending Increasing, Diversified Defense Stocks Set to Benefit
After four years of steady declines, military defense spending by the U. S. government is due to increase in 2016. Although the 2016 budget has not fully passed, comments by President Obama earlier this month stressed the need to keep Americans safe, calling U.S. national security a priority.
While many stocks in the aerospace and defense area will benefit from this increase in spending, the companies that will do best are those that are expanding into other areas. This is primarily due to spending caps from the 2013 sequestration that demanded a decrease in defense spending. Diversified companies have the ability to generate healthy revenues in several areas -- regions and product lines -- instead of a few.
Take a look at a diversified company such as Raytheon (RTN) - Get Report , which jumped over 4% to $117.49 a share Thursday after the company reported that revenues would be higher than expected for the year. The company's sales hit a five-year high. Raytheon's growth in international markets helped bolstered its results. International bookings accounted for 41% of total bookings in the first half of this year. The company reported a decline in profits for its third quarter but its earnings were still slightly ahead of the company's and analysts' expectations.
Approximately 80 countries use Raytheon products with the strongest demand coming from the Middle East after geopolitical changes occurred there. More recently, the company has found new opportunities in Asia as well as Europe
Raytheon is looking to grow in other areas, as well. Since the U.S. Department of Homeland Security has been emphasizing the need to increase cyber security, Raytheon has been spending to improve its cyberspace programs, both internally as well as through acquisitions. In May, it purchased Websense, and earlier in the year, it acquired Foreground Security. Both offer cyberspace security technologies.
Northrup Grumman (NOC) - Get Report is another military defense company that is expanding overseas. Last month, it signed a long-term agreement with Norway's Kitron AS. And its South Korean office continues to expand its work on the Black Hawk project that has Northrup producing the final product aircraft at its Palmdale, Calif. facility.
Northrup has had a strong presence in cybersecurity for over 30 years, and, more recently, won awards in Europe and the U.S. for its advances in this space. The company is due to report its third quarter earnings next week and analysts are optimistic after last quarter's 14% surprise to the upside.
In addition to improving fundamentals for its military defense stocks, studies have shown that defense-related stocks tend to do well in the year leading up to an election. That, plus the fact that many of these stocks offer a dividend, makes them attractive.
This article is commentary by Mary Ellen McGonagle, president of MEM Investment Research, and an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.








