The Best Bargain Buy in the Defense Sector

Written By Jason Simpkins

Posted February 24, 2024

Last year, RTX Corp. (NYSE: RTX) hit a snag. 

The world’s second-largest defense contractor found that 3,000 Pratt & Whitney jet engines needed inspections for potentially flawed components. 

The recall tanked the RTX’s stock.

Still, understanding the company’s role as a major missile supplier (RTX makes all manner of missiles including Patriot, Stinger, Tamir, SkyHunter, etc.), I advised investors to buy the dip. 

I even listed the company at No. 4 in The Wealth Advisory’s Top 10 Stocks to Own” for the month of November

Turns out my instincts were right.

Violence erupted throughout the Middle East and soaring defense spending worldwide helped RTX rebound. The company’s third- and fourth-quarter earnings topped expectations as a result. 

Today the stock is close to $90 per share, up from around $70 in early October.

I don’t think the rally is over, either. I’m fairly confident RTX will climb back above $100 per share by the end of year, tacking another 10% onto its current price.

However, having said that, RTX may not be the defense sector’s biggest bargain anymore. 

Today, I’m looking at a different defense giant that’s suffered some recent setbacks. 

And that’s Northrop Grumman (NYSE: NOC).

Like RTX last year, Northrop Grumman has caught some bad breaks these past few months. 

The company got off to a strong start in early January, climbing to $481. But then calamity struck.

Northrop took a nasty $1.56 billion pre-tax charge against its next-generation stealth bomber, the B-21 Raider. 

Turns out the Air Force used 2010 as the base year for calculating the bomber’s costs — which was $550 million for the initial 2015 contract. Of course, with inflation that translates to $778 million, which means in today’s dollars Northrop will be selling its first five production lots at a loss of roughly $228 million a piece.

The market responded with a sell-off that shaved 10% off the company’s stock.

More bad news came last week when the Space Force backed out of a deal with Northrop to develop a classified military communications satellite. This decision was attributed to increased costs, difficulties developing its payload, and schedule delays.

This development will shave about $2 billion off of the company’s first-quarter backlog. 

Still, in the grand scheme of things, these are just minor setbacks. And Northrop Grumman still plays a major role in the defense industry. 

In fact, it’s spearheading some of America’s most important defense initiatives, including the Sentinel intercontinental ballistic missile (ICBM). The Sentinel is set to replace the Minuteman missile as our ground-based strategic deterrent (the nuclear missiles hiding in silos throughout the country).

And outside of the B-21 setback, the company’s fourth-quarter and full-year earnings were pretty good.

Northrop reported a record backlog of $84.2 billion driven by a full-year book-to-bill ratio of 1.14.

Fourth-quarter sales rose 6%, to $10.6 billion, while full-year revenue surged 7%, to $39.3 billion.

And if not for the one-time charge related to its B-21 program, the company would have reported EPS of $21.21 instead of a lackluster $13.53.

Nevertheless, with that loss in the rearview mirror, Northrop still forecast strong 2024 sales and margin guidance inline with its prior outlook. 

And in fact, the company also reaffirmed 2024 and 2025 free cash flow outlook and projected growth through 2026.

So Northrop Grumman may be in a bit of slump today, but it’s a good long-term bet down the line — and it pays out a 1.64% dividend yield, to boot.

Of course, if you want to get in on some serious defense gains, you should check out my Secret Stock Files investment service, where I cover all the bleeding edge military tech mainstream investors never hear about.

We’re even up 167% on an AI play that you can find out about here.

Fight on,

Jason Simpkins Signature

Jason Simpkins

Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more…

In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor’s page.

Be sure to visit our Angel Investment Research channel on YouTube and tune into Jason’s podcasts.

Want to hear more from Jason? Sign up to receive emails directly from him ranging from market commentaries to opportunities that he has his eye on. 

follow basic@OCSimpkins on Twitter

Angel Pub Investor Club Discord - Chat Now

Jason Simpkins Premium

Introductory

Advanced