Watch these Stocks at J.P. Morgan's Aviation, Transportation, & Defense Conference

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J.P. Morgan is hosting its annual Transportation & Defense conference in New York City from Monday, March 4 through Wednesday, March 6. Traditionally, each investment bank on Wall Street hosts a conference dedicated to a unique market sector.

Specific to this week’s conference are public companies involved in aviation, transportation, and defense. With a growing chorus of pundits calling for a market pullback, I’m interested in reducing my higher beta exposure and transitioning into more defensive stocks such as those involved in defense contracting.

Here are a few select companies I believe readers can own for the remainder of 2013 that are presenting at the upcoming J.P. Morgan conference.

Landstar System (NASDAQ: LSTR)
Wednesday, March 6 at 10:25 a.m.

The Jacksonville, FL based Landstar is a non-asset based provider of freight transportation. Unlike the other trucking companies presenting at J.P. Morgan’s conference, Landstar System uses third-party capacity to transport and store goods for its customers.

What are the advantages and disadvantages of this model? The main difference is Landstar has a high degree of operating leverage, indicating that a pickup in sales (no pun intended) will translate to a greater amount of operating income due to higher fixed costs and lower variable costs.

Landstar employs a dedicated network of more than 8,000 dedicated capacity owners. These small truck operators work only for Landstar which allows the company to offer a wider range of services based on customer needs. In addition to truckload, Landstar also provides air, ocean, and rail intermodal transportation.

On January 31, Landstar reported Q4 earnings per share of $0.73 (higher than consensus) while revenue came in light at $691 million vs. an expected $714 million. Investors should recognize that Landstar had a difficult comparison to the prior year, as the company had fourteen weeks during Q4 2011 compared to only thirteen weeks during Q4 2012.

Oppenheimer & Co. and Wells Fargo are two research firms that have upgraded Landstar so far in 2013. Analysts at Oppenheimer & Co. raised their price target to $63 following the company’s Q4 results, stating Landstar’s asset-light business should benefit from a high return on invested capital. Readers should understand that it’s easier for Landstar to move the proverbial needle due to lower fixed investment.

I will be looking for Landstar management to provide an update on the trucking business environment at this week’s conference.

Lockheed Martin (NYSE: LMT)
Tuesday, March 5 at 11:00 a.m. EST

Shares of the defense and aerospace company have fallen approximately 4.5% year-to-date through March 1. The modest pullback is likely attributed to investor concerns over the upcoming sequestration discussions in Washington, DC.

Let’s take a look at the facts before determining if a further sell-off is warranted. On January 24, Lockheed Martin reported fourth quarter EPS of $1.73 and revenue of $12.1 billion. Earnings came in lighter than consensus of $1.82, while revenue was higher than expectation of $11.16 billion.

Looking forward to 2013, management provided guidance of $8.80 to $9.10 per share giving the stock a 10x forward P/E multiple.

The story sounds great and the valuation is attractive. However, what does Wall Street think regarding Lockheed Martin and the upcoming budget talks?

On January 25, Cohen and Company told its clients to buy Lockheed Martin based on the strong fourth quarter and the likelihood for a dividend increase over the next two years. The Wall Street firm advised that the recent sell-off provided a good entry point for investors and has an Outperform rating on the stock. Lockheed Martin pays $1.15 per quarter in dividends, giving the stock a 5.2% yield based on recent market prices.

I like Lockheed Martin and believe shares will outperform the market over the next 12 months. Consistent with the company’s history of raising its dividend, it’s likely a 10% to 15% increase in payout will be announced during the next fiscal year.

Transportation Stocks
Tuesday, March 5 (WERN 8:00 a.m.; HTLD 8:45 a.m.; KNX 9:30 a.m.)

While I alluded in the introduction that I am decreasing my overall risk level, transportation is one beta area I continue to increase exposure. These stocks are not “defensive” in nature and should only be bought if you are a believer in the trucking expansion cycle.

Freight activity and trucking are cyclical in nature, and recent data points indicate that truck utilization continues to increase. Wall Street is also betting that tractor trailer stocks will push higher.

Analysts at KeyBanc upgraded Heartland Express and Knight Transportation to Buy from Hold on February 11.

Truckload (TL) and less than truckload (LTL) pricing is expected to increase in the low-single digits excluding any fuel related surcharges. Furthermore, truck capacity which was shed during the 2008-09 recession is not coming back, which supports higher prices due to limited availability.

The Cleveland, OH based KeyBanc set a $16 price target on Heartland and $19 target on Knight. Both companies are presenting on Tuesday at J.P. Morgan’s conference.

Werner Enterprises (NASDAQ: WERN) is another trucker presenting on Tuesday. Bank of America Merrill Lynch upgraded the stock following improved data points and higher confidence among truckers based on its internal survey. The price target on Werner Enterprises was raised to $27 from $23.

Foolish Bottom Line

Historically, defense stocks have outperformed the broader market in the event of a pullback. Lockheed Martin is my favorite among the group, and the company’s solid dividend limits the downside risk in my opinion. Finally, while not defensive in nature, transportation companies such as Heartland, Knight, and Werner are poised to benefit from structural changes in the trucking business.

Readers can view the agenda for J.P. Morgan’s three-day conference on the bank's website.

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