Benzinga - Goldman Sachs (NYSE:GS) analyst Noah Poponak downgraded Lockheed Martin Corp (NYSE: NYSE:LMT) to Sell from Neutral with a price target of $332, down from $388.
LMT is the Defense bellwether, the most significant prime with 75% exposure to U.S. Defense spend, making it highly levered to the industry dynamics.
The defense budget has grown significantly to an all-time high level, and with a significant cumulative U.S. government debt, focus on slowing spending growth or reducing it outright could return in 2023.
LMT is highly diversified across the defense end-market, which often grows directly proportional to the budget.
However, LMT's program-specific headwinds like F-35, Blackhawk, OPIR, and tough compares in missile and missile defense creates a distinctive growth headwind on top of the overall budget pressures the analyst believe could materialize.
Poponak downgraded Northrop Grumman Corp (NYSE: NYSE:NOC) from Neutral to Sell and lowered the price target from $440 to $375.
Northrop Grumman is a Defense prime with an 85% U.S. Defense mix.
While NOC has won two large, early-stage Defense programs that could allow it to outgrow the budget over the next few years (B-21 and GBSD), it is susceptible to any budget pressures should they mount.
NOC faces margin pressure from cost input inflation and free cash flow pressure from the R&D cash tax input. EPS and FCF estimates for NOC have been consistently decreasing recently.
NOC is also the most expensive Defense prime the analyst covers.
Poponak downgraded Raytheon (NYSE:RTN) Technologies Corp (NYSE: RTX) from Buy to Neutral and lowered the price target from $115 to $105.
RTX combines solid commercial aerospace parts and engine business with Raytheon Defense.
The analyst still favors the commercial aerospace business and sees a meaningful upside to normalized revenue and margins as the global air travel and new aircraft build rate recovery continues.
Commercial aero is up to 2/3 of the portfolio in a typical environment. However, Defense is a substantial part of the mix, and the company's growth rate and valuation will be dictated mainly by conditions in the defense end-market.
RTX is relatively well positioned within the defense end-market; but has seen recent industry outlay pace and supply chain challenges, which could continue into 2023 and put the 2025 targets at risk in the segments.
Price Actions: LMT shares traded lower by 2.2% at $451.60 on the last check Friday. NOC shares traded lower by 3.93% at $468.27, and RTX shares traded lower by 2.24% at $98.44.
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Latest Ratings for LMT
| Mar 2022 | Wells Fargo (NYSE:WFC) | Maintains | Equal-Weight | |
| Mar 2022 | Morgan Stanley (NYSE:MS) | Maintains | Overweight | |
| Feb 2022 | Wolfe Research | Upgrades | Peer Perform | Outperform |
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