Defense sector stocks’ overall risk remains high and valuations low, says Michael F. Ciarmoli, Vice President with KeyBanc Capital Markets Inc., but defense companies have strong balance sheets and are generating strong free cash flows, even if there is a military budget reduction.
“Their backlogs are going to provide them with very good visibility in the coming periods. Even if the budget gets cut, there is still going to be a lot of money to extract revenues from. And if we do go into a double-dip recession, I think defense outperforms relative to industrials, so they could make for a good hiding place,” Ciarmoli said.
Ciarmoli has a “buy” rating on Orbital Sciences (ORB), a defense company with exposure to defense and commercial satellites, missile targets for high-end Ballistic Missile Defense Systems, an array of launch vehicles that cater to the commercial space market and the military space market, and NASA.
“[Orbital’s] exposure to Middle East war activities, optempo and any sort of force structure cuts within the Department of Defense is very limited,” Ciarmoli said. “They’re one of the few companies in the defense sector growing revenues and operating income at a double-digit organic rate while expanding operating margins.”
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