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IBDvalueinvestin (98.35)

BUSH said IRAN & N.Korea are part of Axis of Evil



May 28, 2010 – Comments (3) | RELATED TICKERS: LMT , RTN , GD

Well Bush left the Job to Obama to mop up Axis of Evil and Obama is acting. Recent reports say Obama is beefing up Warships around Iran.

Prelude to an attack if you ask me?


New Tensions May Benefit Defense Contractors

Posted: May 25, 2010 12:23 PM by Joseph Nguyen

 Tickers in this Article: BA, GD, LLL, LMT, NOC, RTN, UTX

When you hear of sin stocks, people are usually referring to stocks profiting from our human vices - such as gambling, booze, narcotics and sex. But perhaps the biggest 'sin' stocks of them all, that isn't typically mentioned with this group, may be business' that profit from war. Defense contractors and Arms manufacturers typically see their profits correlated with the level of tension and conflict between nations, and so investors looking to invest in these stocks may be especially interested in the recent military activity in the Persian Gulf.


Iranian Intensification
According to political analysis site, the Obama administration is beefing up its military presence around Iran by sending additional carrier groups to the waters surrounding the country. Currently there is only one U.S. carrier off the shores of Iran, but this new buildup will increase the number of U.S. carriers to two with an additional four U.S. warships on the way, as well as a German warship and 6,000 marines. With Iran's history of defiance towards the West, I anticipate a strong reaction by Iran in response to this massive show of force off the Iranian coast.

In addition to the sea, it appears the U.S. is also increasing military infrastructure on land around Iran. Bloomberg reported on Friday that the Pentagon is expanding and upgrading an airbase just outside Iran's border. The base is being upgraded to support operations in Afghanistan, however its proximity to Iran leads some analysts to speculate it could likely be used to monitor Iran's activities. 

Who Will Benefit?
If this escalation of military presence provokes Iran in an adverse way, defense contractors could stand to profit. The top U.S. defense contractors (listed on major exchanges) saw their stocks rise as the war in Iraq started in 2003, and could see a similar boost should the Iran situation escalate further. With that said, some of the biggest U.S. defense contractors to keep an eye on are listed below:


Top 7 Defense Contractors Ticker P/E (ttm) Lockheed Martin Corp. LMT 10.74 Northrop Grumman NOC 11.75 Boeing Co. BA 38.93 General Dynamics Corp GD 10.85 Raytheon Co. RTN 10.82 United Technologies Corp. UTX 15.55 L-3 Communications Holdings LLL 10.69

Lockheed Martin Corp.
Lockheed Martin has typically been the biggest recipient of contracts handed out by the Department of Defense, followed closely by Boeing and Northrop Grumman. Lockheed's first-quarter report in 2010 generally beat analyst expectations across the board. The company reported EPS of $1.45, which was above consensus estimates of $1.34, and which continues the trend of positive earnings surprises.  Also, of note was the company's increase in free cash from $1.1 billion in Q1-2009 to $1.5 billion in the most recent quarter - which was the highest level of cash generated for a quarter in Lockheed's history.

Bottom Line
Arms and munitions is an out-of-favor sector in many people's eyes and has been so for a long time - which may explain the relatively low valuations for this sector. But within the sector, it appears that the top contractor, Lockheed, also trades at a discount to its peers that may be worth looking into. (For related reading, take a look at Sinful Investing: Is It For You?)

By Joseph Nguyen

Joseph Nguyen is an Research Analyst and contributing author at Investopedia. He graduated from the University of Alberta with a Bachelor of Commerce degree and specializes in financial analysis and research. Prior to joining Investopedia, he worked at a securities brokerage firm.




3 Comments – Post Your Own

#1) On May 28, 2010 at 12:52 PM, IBDvalueinvestin (98.35) wrote:

One thing to keep in mind, is that in the past Recessions have led to Wars. For example 1930's recession led to World War II in 1938.

So people selling off defense stocks today maybe are blind to historical events.



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#2) On May 28, 2010 at 1:10 PM, IBDvalueinvestin (98.35) wrote:

Wow we just had a mini flash crash.


Every stock fell at exactly the same time at 12:40 to 12:50

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#3) On May 28, 2010 at 2:14 PM, smartmuffin (< 20) wrote:

I never really got the whole "send another carrier group" reaction.  Even if Iran went crazy, could one carrier group not handle it?  Presuming they don't go completely insane, what difference does the amount of ships nearby really make?  Is four ships that won't fire on you under any circumstance really more intimidating than one ship that won't fire on you under any circumstance?  We're really supposed to believe Iran feels threatened by this move from the apologist in chief?

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