Are These 3 Aerospace & Defense Stocks a Buy?

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The budget problems surrounding the United States have had an impact on aerospace and defense stocks. The US defense budget has been a prime target for cuts, and defense stocks clearly will feel the pain of the cuts. Global defense spending also dropped by 0.5% in 2012, according to The Stockholm International Peace Research Institute, the first decrease since 1998. However, with most of the anticipated cuts priced in, let's look at three companies to see if now might be the time to invest. 

The beat-up conglomerate

Textron (NYSE: TXT) operates in the aircraft, defense, industrial, and finance businesses. The company is responsible for well known brands Cessna and Bell Helicopter.

The company's stocks is trading far below its 52-week high, and the most recent quarterly earnings report was unimpressive. EPS slipped $0.01 and revenue came in flat versus the prior year. Interestingly enough, the poor results were not attributed to the segments fueled largely by government spending. Rather, soft demand in the business-jet market caused the drag on revenue.

Textron has acknowledged the issues with the business-jet market and has adjusted its strategy accordingly. The company adjusted production schedules and implemented other cost actions within the Cessna segment. Textron expects lower deliveries in the light category to be partially offset by growth in the midsize category.

Despite the actions being taken in the current fiscal year, the company still sees strong long-term growth in the global business-jet market. It remains committed to its new product plan, which includes the introduction of a new model and updates to four current models by 2017. 

The leader

Lockheed Martin (NYSE: LMT) is the world's largest defense contractor by revenue. The company's stock is trading near 52-week highs, despite a warning in the most recent quarter that government budget cuts would hit the company over the next two quarters. Lockheed updated its full-year sales forecast and stated that the cuts should have less that a 2% impact on revenue. The company also maintained its 2013 profit forecasts. 

Lockheed Martin expects to strengthen international sales over the next few years to 20% of total sales, versus the 17% currently reported to help address decreased US government spending.

Patriot missiles and more

Raytheon (NYSE: RTN) provides electronics, mission systems integration, and other capabilities in support of mission services in the United States and internationally. Raytheon is one of the largest makers of military weapons and trades near its 52-week high. The company has already announced that it expects up to a 12% drop in earnings as a result of government spending cuts. 

Raytheon recently announced a reorganization plan to help cut costs. It will consolidate to four business units from the five it previously maintained and cut 200 jobs to save approximately $85 million.

Time to buy

While the government budget cuts will impact all of these stocks, many people think these companies have overstated the potential impact of the budget cuts. Textron, unlike the other two companies, only received 29% of its 2012 revenue from government spending. While this is a significant amount, the other companies are almost solely reliant on government spending. Textron has addressed the issues that hurt the most recent quarter and seems to be positioning well for long-term growth.

Lockheed Martin is the industry leader and should have no trouble growing international revenue. The company should weather the cuts well and will also pay you to wait with a current dividend yield of 4.4%.  Even if revenue drops by the anticipated 2%, there should be no risk of a dividend cut.

Raytheon has estimated the largest potential decline due to spending cuts, but it could be overstating the true risk. The company is cutting costs and seems committed to handling the revenue declines to mitigate a decrease in profitability.  The dividend yield of 3.3% will also entice investors to stick with the stock. 

All three stocks deserve a close look if you think that further government spending cuts can be avoided. If the current cuts are priced in, there is upside potential due to the overstated spending-cut impact.

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John Timmes has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin, Raytheon Company, and Textron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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