Defense spending in the United States is expected to surpass $2 trillion in 2023. The U.S. military is forecasting that it will award procurement contracts worth more than $300 billion this year. These are massive sums of money make the American military the most technically advanced, sophisticated, and powerful in the world. They also feed a robust and growing sector of defense contractors. With all of this money going into defense contractors, there are some undervalued defense stocks to consider.
From stealth fighter jets and nuclear submarines to drones and combat-ready robots, the U.S. Defense Department funds an impressive constellation of companies that help it to create and sustain a high-tech armed force. Growth in the defense sector has been on the rise since Russia invaded Ukraine in early 2022. This lead to the first major land war in Europe in more than 70 years. As defense spending continues apace, we take a look at the three most undervalued defense stocks to buy in September 2023.
Known primarily as the largest independent provider of FAA-approved aircraft replacement parts, Heico (NYSE:HEI) is also a major supplier of parts and equipment to the U.S. military. Specifically, Heico makes aviation systems and components for the U.S. Air Force. This is a growing part of the company’s business and makes Heico a defense contractor to watch. Heico also continues to be a high growth company that has reported a string of financial results that have beaten analyst forecasts. In fact, Heico has beaten Wall Street’s bottom-line earnings in eight of the last 10 quarters.
At the end of August, Heico again beat earnings estimates on both the top and bottom lines. However, HEI stock fell 5% despite the strong performance as analysts want and expect more from the company. Heico’s share price is up only 7% this year, trailing the 17% gain in the Standards and Practices (S&P) 500 index. Through five years, the company’s shares price has risen 75%. With the stock down 10% since the end of July, now would be a good time for investors to take advantage of the pullback and purchase shares. The median price target on HEI stock is 23% higher than current levels.
Boeing (NYSE:BA) is another company that investors don’t readily associate with the military. The company is mostly known for manufacturing commercial passenger aircraft. However, Boeing too is a major player in the defense sector. In 2022, defense revenues totaled $23.16 billion at Boeing, representing 35% of its total sales. Within the defense sector, Boeing is known for making the iconic B-52 bomber, as well as fighter jets such as the FA-18 and F-15 Hornets. The aircraft maker is also building the T-7 Red Hawk trainer jets, the MQ-25 Stingray drone, and the KC-46 tanker for the Air Force and Navy.
Additionally, Boeing has a strong presence in the space sector with its Starliner space transportation aircraft that is being used to ferry astronauts to the international space station. BA stock has struggled for many years following multiple crashes of its commercial 737 Max aircraft, as well as ongoing manufacturing issues on the commercial side of its business. As a result, Boeing’s share price today is trading 42% lower than where it was five years ago. Patient investors who have long time horizons may want to buy-the-dip in BA stock, especially as the company’s military business grows.
General Dynamics (GD)
General Dynamics (NYSE:GD) mostly produces vehicles and weapons systems for the U.S. military. Currently the fifth-largest defense contractor in the world, General Dynamics is known for producing jeeps and armored personnel carriers for the army. The company has endured some supply chain issues coming out of the pandemic that have harmed its earnings and weighed on its stock. Consequently, the company’s share price is down 12% this year. However, Bank of America (NYSE:BAC) has a “buy” rating on GD stock and a $305 price target, which is 40% above where the stock currently trades.
Trading at 17 times forward earnings and paying a quarterly dividend of $1.32 for a yield of 2.41%, General Dynamics looks undervalued at current levels. Additionally, the company has a reputation for having a strong balance sheet and plenty of cash. This enables General Dynamics to grow both its dividend and stock buybacks. The company isn’t just a defense contractor. Unbeknownst to most people, General Dynamics also makes Gulfstream business jets that are used to fly CEOs and celebrities around the world. With defense budgets around the world rising as the war in Ukraine drags on, GD stock could be a beneficiary.