The Economist noted today (March 18, 2009) that America accounted for $1.2 trillion in military spending in 2007 or 45% of the entire world’s expenditures in this area. That was more than the next 14 biggest countries spent combined. Russia announced yesterday that they are beginning a comprehensive rearmament as NATO advances into parts of the former Soviet Union. China said it would increase their military spending by 14.9% to about $70 billion this year. War may be hell but it doesn’t come cheap.
President Obama seems determined to prove he is no pushover on national security and wants to present a strong image as Commander in Chief. Our defense budget is not likely to be going down anytime soon.
Despite this robust macro industry view, many of the best quality defense companies have recently hit new multi-year lows. I bought three in the past week that seem like exceptional values right now. All have better than average earnings predictability, A+ or A++ financial strength ratings and top safety ratings (from Value Line). All three have attractive and well covered dividend yields that exceed today’s bank CD rates.
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Here are my new purchases and my take on what they might be worth over the next 12 – 18 months:
General Dynamics [NYSE:GD] March 18, 2009 close: $39.22
52-week range: $35.28 (March 6, 2009) - $95.13 (May 19, 2008)
Dividend = $0.38 quarterly = 3.88% current yield
Consensus estimates now run $6.08 and $6.37 for 2009 & 2010 making GD’s multiple a stunningly low 6.5x this year’s and 6.1x next year’s expectations. That’s the lowest valuation for these shares in about 20 years.
General Dynamics has a 10-year median P/E of 16 and Value Line looks for a 14 multiple as a ‘normalized’ figure for the long term. Fourteen times the $6.08 estimate would bring these shares back to > $85 /share.
Is that crazy? Nope. GD shares traded as high as $78 in 2006 on EPS of $4.20 and were $94.60 and $95.10 at their peaks in 2007 and 2008. They were $61.50 just this past January.
The 3.88% yield is the best in decades. The previous best yields were set at 2.76% and 2.40% in early 2000 and early 2003. Buyers near 2000’s lows saw their shares go from a [split-adjusted] $18.10 to $55.60 in the next 26 months. Those who got in during March 2003 watched GD surge from $25 to > $61 in under 30 months.
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Northrop Grumman [NYSE:NOC] March 18, 2009 close: $38.82
52-week range: $33.81 (March 6, 2009) - $80.63 (March 19, 2008)
Dividend = $0.40 quarterly = 4.12% current yield
Consensus estimates now run $4.83 and $5.64 for 2009 & 2010 making NOC’s multiple a historically low 8x this year’s and < 7x next year’s expectations. That’s the lowest valuation for these shares since early 2000.
Northrop Grumman has a 10-year median P/E of 16 and Value Line looks for a 14 multiple as a ‘normalized’ figure for the long term. Fourteen times the $4.83 estimate would bring these shares back to $67.62 /share.
Is that an achievable target price? Sure. NOC shares hit peak prices of $71.40, $85.20 and $83.40 in 2006-2007-2008 and were > $50 since January 1st this year. Buyers of NOC shares in March 2000 with a similar P/E to today’s, saw their shares skyrocket from a [split-adjusted] $21.30 to $67.50 over the next 26 months.
The current yield of 4.12% in the highest since 1993 and represents just a 34% payout ratio on expected earnings.
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Raytheon [NYSE:RTN] March 18, 2009 close: $36.33
52-week range: $33.20 (March 12, 2009) - $67.37 (April 9, 2008)
Dividend = $0.28 quarterly = 3.08% current yield
Consensus estimates now run $4.63 and $4.97 for 2009 & 2010 making RTN’s multiple just 7.8x this year’s and < 7.5x next year’s projections. That’s the lowest valuation for these shares that I remember seeing.
Raytheon has a 10-year median P/E of 19 and Value Line looks for a 15 multiple as a ‘normalized’ figure for the long term. Fifteen times the $4.63 estimate would bring these shares back to $69.45 /share.
Is that a stretch? I don’t think so. The 2007 and 2008 highs for RTN were $65.90 and $67.50 when revenues, cash flow, dividend rates and EPS were all well below what they are today.
The current yield of 3.08% in the highest since 2000 and represents just a 26% payout ratio on expected earnings for 2008.
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All three companies have great balance sheets. GD has total interest coverage of 25x while NOC comes in at > 10x and RTN has total interest coverage of >20x.
Value Line rates GD, NOC and RTN at 95th, 95th and 100th percentiles for ‘stock price stability’ (with 100th being best). All three company's Betas also come in low -
at 0.9, 0.75 and 0.70 respectively.
In a dangerous world and a volatile stock market environment, it makes me feel secure to own high yielding, good-quality and low risk shares such as these defense industry stalwarts.
Disclosure: Author recently bought shares of GD, NOC and RTN.
President Obama seems determined to prove he is no pushover on national security and wants to present a strong image as Commander in Chief. Our defense budget is not likely to be going down anytime soon.
Despite this robust macro industry view, many of the best quality defense companies have recently hit new multi-year lows. I bought three in the past week that seem like exceptional values right now. All have better than average earnings predictability, A+ or A++ financial strength ratings and top safety ratings (from Value Line). All three have attractive and well covered dividend yields that exceed today’s bank CD rates.
**********************************************************************
Here are my new purchases and my take on what they might be worth over the next 12 – 18 months:
General Dynamics [NYSE:GD] March 18, 2009 close: $39.22
52-week range: $35.28 (March 6, 2009) - $95.13 (May 19, 2008)
Dividend = $0.38 quarterly = 3.88% current yield
Consensus estimates now run $6.08 and $6.37 for 2009 & 2010 making GD’s multiple a stunningly low 6.5x this year’s and 6.1x next year’s expectations. That’s the lowest valuation for these shares in about 20 years.
General Dynamics has a 10-year median P/E of 16 and Value Line looks for a 14 multiple as a ‘normalized’ figure for the long term. Fourteen times the $6.08 estimate would bring these shares back to > $85 /share.
Is that crazy? Nope. GD shares traded as high as $78 in 2006 on EPS of $4.20 and were $94.60 and $95.10 at their peaks in 2007 and 2008. They were $61.50 just this past January.
The 3.88% yield is the best in decades. The previous best yields were set at 2.76% and 2.40% in early 2000 and early 2003. Buyers near 2000’s lows saw their shares go from a [split-adjusted] $18.10 to $55.60 in the next 26 months. Those who got in during March 2003 watched GD surge from $25 to > $61 in under 30 months.
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Northrop Grumman [NYSE:NOC] March 18, 2009 close: $38.82
52-week range: $33.81 (March 6, 2009) - $80.63 (March 19, 2008)
Dividend = $0.40 quarterly = 4.12% current yield
Consensus estimates now run $4.83 and $5.64 for 2009 & 2010 making NOC’s multiple a historically low 8x this year’s and < 7x next year’s expectations. That’s the lowest valuation for these shares since early 2000.
Northrop Grumman has a 10-year median P/E of 16 and Value Line looks for a 14 multiple as a ‘normalized’ figure for the long term. Fourteen times the $4.83 estimate would bring these shares back to $67.62 /share.
Is that an achievable target price? Sure. NOC shares hit peak prices of $71.40, $85.20 and $83.40 in 2006-2007-2008 and were > $50 since January 1st this year. Buyers of NOC shares in March 2000 with a similar P/E to today’s, saw their shares skyrocket from a [split-adjusted] $21.30 to $67.50 over the next 26 months.
The current yield of 4.12% in the highest since 1993 and represents just a 34% payout ratio on expected earnings.
**********************************************************************
Raytheon [NYSE:RTN] March 18, 2009 close: $36.33
52-week range: $33.20 (March 12, 2009) - $67.37 (April 9, 2008)
Dividend = $0.28 quarterly = 3.08% current yield
Consensus estimates now run $4.63 and $4.97 for 2009 & 2010 making RTN’s multiple just 7.8x this year’s and < 7.5x next year’s projections. That’s the lowest valuation for these shares that I remember seeing.
Raytheon has a 10-year median P/E of 19 and Value Line looks for a 15 multiple as a ‘normalized’ figure for the long term. Fifteen times the $4.63 estimate would bring these shares back to $69.45 /share.
Is that a stretch? I don’t think so. The 2007 and 2008 highs for RTN were $65.90 and $67.50 when revenues, cash flow, dividend rates and EPS were all well below what they are today.
The current yield of 3.08% in the highest since 2000 and represents just a 26% payout ratio on expected earnings for 2008.
**********************************************************************
All three companies have great balance sheets. GD has total interest coverage of 25x while NOC comes in at > 10x and RTN has total interest coverage of >20x.
Value Line rates GD, NOC and RTN at 95th, 95th and 100th percentiles for ‘stock price stability’ (with 100th being best). All three company's Betas also come in low -
at 0.9, 0.75 and 0.70 respectively.
In a dangerous world and a volatile stock market environment, it makes me feel secure to own high yielding, good-quality and low risk shares such as these defense industry stalwarts.
Disclosure: Author recently bought shares of GD, NOC and RTN.
