Russia’s war in Ukraine shows no sign of ending, and the news of civilian deaths in places like Kramatorsk, Bucha, and Irpin—and the fact that they are likely intentional—has inspired grief and anger. With that as the backdrop, it’s difficult to think about investing, particularly in companies that make weapons of war.
The market seems to have had a similar reaction. Defense stocks jumped when Russia invaded Ukraine—the Invesco Aerospace & Defense exchange-traded fund (ticker: PPA) gained 9.6% from Feb. 23 through March 7—but have been fairly rangebound ever since. The dynamic has been even more apparent in the big defense stocks. General Dynamics (GD) gained 14% but then fell 1.4%, while Lockheed Martin (LMT) rallied 20% before dipping 0.3%, and Northrop Grumman (NOC) surged 24% before declining 1.8%.
Russia’s actions, however, demonstrate that more money will need to be spent on the military, if only to prevent what’s happening in Ukraine from happening elsewhere. Like it or not, that should mean stronger profits for defense companies, as European nations, which had long resisted meeting NATO goals, suddenly spend billions and Congress upsizes budget requests.
Wall Street forecasts do not reflect this new reality. Byron Callan of Capital Alpha Partners notes that they have barely budged since the war began and are actually lower since the start of the year. That doesn’t mean that analysts don’t think earnings will end up beating expectations, just that they aren’t likely to show up in first-quarter numbers, and that they’re waiting to hear from the companies before making adjustments.
Still, defense stocks are worth a look, particularly General Dynamics, says Cowen analyst Cai von Rumohr. He notes that the company gets about 40% of its earnings before interest and taxes from weapons and systems used in ground warfare, and those programs could get a boost in new budgets. It is also working on new, more mobile tanks and weapons to be used on helicopters and drones. It could also get a boost from sales to Europe, von Rumohr says. General Dynamics should be able to offer more detail when it reports earnings on April 27.
General Dynamics isn’t just a defense company. It also makes Gulfstream business jets, and UBS analyst Myles Walton expects deliveries to come in above expectations.
The recent pause leaves General Dynamics stock trading at $242.04, just above its 2018 and 2021 highs. That’s created a “big base that suggests significant upside potential,” according to BofA Securities technical analyst Stephen Suttmeier.
If the fundamentals line up with the technicals, that could be an understatement.
Write to Ben Levisohn at [email protected]