Al Root

President Donald Trump's trillion-dollar request for defense in his fiscal 2026 budget request tells investors something: Trump's peace through strength positioning isn't bad for the industry.

But the proposed spending levels might not lead to a bump for defense stocks just yet.

The president on Friday released his fiscal 2026 " skinny," or initial, budget request. Included was a 13% boost in defense spending to $1.01 trillion.

That level of growth is good for defense stocks, and it probably hasn't been priced in yet. "At about a 15% discount to industrials, we estimate current defense valuations are about in line with periods of zero budget growth," wrote Wells Fargo analyst Matthew Akers in a report Friday.

Lockheed Martin, Northrop Grumman, L3Harris Technologies, General Dynamics, and Huntington Ingalls Industries trade for an average of about 18 times estimated 2025 earnings, according to FactSet. The S&P 500 trades for almost 22 times.

Growth of 13% -- when investors essentially expect nothing -- is a positive. That isn't a green light to buy the shares of defense prime contractors, though. "We think investor sentiment remains mixed on upcoming program review results and skepticism that budget can continue growing from here," added Akers.

There is "still a long road ahead," wrote Capital Alpha Partners analyst Byron Callan in a report, noting it was only the initial request. "Clearly, there are moving parts to DoD spending, including the results of internal program reviews," added Callan. "We are reluctant to call out winners and losers at this point, particularly for large U.S. primes."

The budget proposal "is likely dead on arrival," wrote Citi analyst Jason Gurskey on Sunday. "Republicans don't like the budget gimmicks that generate the $1 trillion number, and Democrats don't like the [roughly] $163B of non-defense cuts."

He is willing to pick some winners and losers, though. Huntington Ingalls, Karman, Northrop, and RTX are the "biggest winners given the emphasis on shipbuilding, nuclear deterrence, and missile defense," wrote Gursky. Lockheed and General Dynamics are the "potential losers."

Gursky still rates Lockheed, General Dynamics, Northrop, Huntington, Karman, and RTX all Buy. His target prices for Lockheed and General Dynamics shares are $600 and $335, respectively. Targets for Northrop, Huntington, Karman, and RTX are $591, $235, $42, and $148, respectively.

Callan covers the industry but doesn't have ratings and price targets on the stocks. Akers, for his part, favors Northrop and L3Harris, rating both stocks at Buy. His price target for Northrop is $525 a share. His price target for L3Harris is $248.

Overall, 57% of analysts covering Northrop stock rate shares Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 55%. The average analyst price target for Northrop stock is about $537 a share.

Almost 75% of analysts rate L3Harris shares Buy. The average analyst price target is about $257.

Unlike Gursky, Akers rates Lockheed and General Dynamics shares at Hold. Those two are less popular than Northrop and L3Harris. Overall, 42% of analysts covering Lockheed stock rate shares Buy, and 43% rate General Dynamics shares Buy.

Overall, 31% of analysts covering Huntington stock rate shares Buy. The average analyst price target is about $199 a share. The Buy-rating ratios for RTX and Karman are 69% and 100%, respectively. The average price target for RTX is about $138. The average target price for Karman is about $40.

Coming into Monday, shares of the six large defense contractors, excluding Karman, have risen about 7% this year, about 10 percentage points better than the S&P 500. Huntington has led the way, up about 22%, recovering from some recent lows. Lockheed shares were the weakest, down about 3%.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 05, 2025 08:08 ET (12:08 GMT)

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