January 27, 2025
The fourth-quarter reporting cycle for defense stocks, housed within the broader Aerospace sector, has started for the year, with a couple of S&P500 industry players having released their quarterly performance so far. In particular, while Teledyne Technologies beat estimates on both fronts, Textron came up with lower-than-expected fourth-quarter sales despite its earnings surpassing the consensus mark.
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Considering the whole picture, we remain optimistic about the fourth-quarter results of the remaining defense majors. Intensifying hostilities continue to engulf the global defense map, thereby compelling nations to safeguard their borders by ordering more cutting-edge defense products.
A handful of defense stocks like Lockheed Martin LMT, Northrop Grumman NOC, Leidos Holdings LDOS and Huntington Ingalls Industries HII, which are set to release their fourth-quarter results soon, are likely to beat on earnings this reporting cycle.
Amid rising global geopolitical instability, particularly fueled by frequent Middle Eastern conflicts in recent times, many nations have been significantly increasing their defense budgets. As the world’s largest weapons manufacturer, the United States consistently draws attention to its defense spending, which remains a critical focus in addressing these escalating security challenges. To this end, it is imperative to mention that in August 2024, the U.S. Senate Committee on Appropriations approved the Fiscal Year (FY) 2025 Defense Appropriations Act, which provides $852.2 billion in total funding. This reflects a 3.3% increase over the approved funding during fiscal 2024.
Such enhanced funding provisions, thereby, raised the chance of increased order inflows for major defense primes from the Pentagon and U.S. allies. This, in turn, must have boosted the defense contractors’ backlog. We expect to witness this once all the major defense players reveal their fourth-quarter numbers.
Long-running conflicts like the Russia-Ukraine issue have also proved beneficial for U.S. defense stocks, prompting the U.S. government to sanction significant defense aid for the affected nations.
Evidently, as of Dec. 30, 2024, the United States has committed more than $66 billion in security assistance to Ukraine since the beginning of the Biden Administration (per a report by the U.S. Department of Defense). Moreover, in September 2024, as per a Reuters report, Israel mentioned that it had secured an $8.7 billion aid package from the United States to bolster its military operations and sustain a qualitative edge in regional defense. No doubt these security aids imply a supply of military arms and ammunition, which, in turn, must have bolstered revenues for U.S. defense stocks in the fourth quarter.
For a handful of defense stocks like General Dynamics, which are also critical commercial aerospace industry players, the steadily growing commercial air passenger traffic has been boosting their quarterly performance. Evidently, we expect to witness a solid 53% rise in General Dynamics’ revenues from its Aerospace segment (a large portion of which comes from commercial customers) in the fourth quarter. Similar trends are likely to have aided the quarterly performance of other defense stocks operating in the aviation industry that are yet to report.
However, some lingering factors like shortage of skilled labor, supply-chain challenges, unfavorable inflation impacts and the International Association of Machinists and Aerospace workers’ strike, which ended in November 2024, might have adversely impacted the overall fourth-quarter performance of the defense stocks.
Per our latest Earnings Preview, fourth-quarter earnings for the Aerospace sector are expected to drop 2.4% on a 19.5% sales decline.
Given the high degree of diversity in the defense space, finding the right stocks with the potential to beat estimates might be quite a daunting task. However, our proprietary Zacks methodology makes it fairly simple.
We are focusing on stocks that have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).
Our research shows that for stocks with this combination, the chances of an earnings beat are as high as 70%.
Earnings ESP provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Below we present five stocks that are expected to come up with an earnings beat this reporting cycle.
Lockheed is the largest defense contractor in the world, with its main areas of focus being defense, space, intelligence, homeland security and information technology, including cyber security. In the quarter to be reported, GPS III SV07, the seventh Global Positioning System (GPS) III space vehicle, designed and built by Lockheed was launched. This reflects the solid prowess that LMT enjoys in the space industry, in addition to its well-established foothold in the defense space. This can be expected to get reflected in the form of solid top-line results.
LMT, with an Earnings ESP of +0.66% and a Zacks Rank #3 at present, is set to release earnings on Jan 28. You can see the complete list of today’s Zacks #1 Rank stocks here .
The Zacks Consensus Estimate for LMT’s sales is pegged at $18.85 billion, while that for earnings is pinned at $6.60 per share.
Lockheed Martin Corporation price-eps-surprise | Lockheed Martin Corporation Quote
Leidos Holdings ’ core capabilities include providing solutions in the fields of cybersecurity, data analytics, enterprise IT modernization, operations and logistics, sensors, collection and phenomenology, software development and systems engineering. Its fourth-quarter results can be expected to benefit from the strong performance of its Health and Civil business segment, particularly in the virtual health solutions product line, as well as solid volumes anticipated from the air traffic management systems.
LDOS, with an Earnings ESP of +12.08% and a Zacks Rank #2 at present, is set to release earnings on Feb. 11. The Zacks Consensus Estimate for LDOS’ sales is pegged at $4.12 billion, indicating a 3.6% improvement from the year-ago quarter’s reported figure. The consensus mark for earnings is pegged at $2.18 per share, implying growth of 9.6% from the prior-year quarter’s reported number.
Leidos Holdings, Inc. price-eps-surprise | Leidos Holdings, Inc. Quote
Northrop Grumman is a global security company that supplies a broad array of products, from space systems, military aircraft, missile defense, advanced weapons and long-range fire capabilities, mission systems, networking and communications to strategic deterrence systems, and breakthrough technologies, such as advanced computing, microelectronics and cyber. In December 2024, NOC revealed that its board of directors has authorized an additional $3 billion for the repurchase of its common stock, increasing the outstanding authorized amount to approximately $4.2 billion. This indicates NOC’s solid financial position, which should be reflected in its upcoming fourth-quarter operating results.
NOC, with an Earnings ESP of +1.37% and a Zacks Rank #3 at present, is set to release earnings on Jan 30. The Zacks Consensus Estimate for sales is pegged at $11.03 billion, indicating a 3.7% improvement from the year-ago quarter’s reported figure.
Northrop Grumman Corporation price-eps-surprise | Northrop Grumman Corporation Quote
Huntington Ingalls designs, builds and maintains nuclear-powered ships, such as aircraft carriers and submarines, and non-nuclear ships, such as surface combatants, expeditionary warfare/amphibious assault and coastal defense surface ships. In October 2024, the company announced that its management has approved a 3.8% hike in its quarterly dividend. Such dividend hikes are indicative of the solid financial position that HII boasts, which should get duly reflected in its fourth-quarter results.
HII, with an Earnings ESP of +8.35% and a Zacks Rank #3 at present, is set to release earnings on Feb 6. The Zacks Consensus Estimate for sales is pegged at $3.03 billion, while that for earnings is pinned at $3.28 per share.
Huntington Ingalls Industries, Inc. price-eps-surprise | Huntington Ingalls Industries, Inc. Quote
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