Defense companies are trading in single-digit p/e ratios and they are facing uncertainty with the domestic budget allocation, while defense spending is already expected to decrease by $450 billion in 10 years, says Peter Skibitski, Senior Analyst at SunTrust Robinson Humphrey, Inc.
“If you’re going to invest in the defense space, I would say just understand you probably have to have at least a medium-term time horizon,” Skibitski said. “However, from a valuation perspective, valuations do seem fairly reasonable, and a lot of these names do have fairly robust dividend yields in the range of 3% to 5%.”
Skibitski has a “neutral” rating on Lockheed Martin Corporation (LMT), and although he downgraded the stock from a “buy” recently, he still likes LMT’s exposure to the F-35 Joint Strike Fighter program, and he says the production is expected to help the company weather the leaner years.
“Because [the F-35 Joint Strike Fighter] program has not yet ramped into full rate production, I think that is going to provide them some sales support for some time, even in a declining DoD budget environment, because it’s so huge and it’s scheduled to be basically the largest program in DoD history,” Skibitski said.
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