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An RBC Capital analyst initiated coverage on several defense stocks, with Outperform rating assigned to General Dynamics Corporation (NYSE:GD) with a $275 price target, L3Harris Technologies, Inc. (NYSE:LHX) with a $285 price target, and Northrop Grumman Corporation (NYSE:NOC) with a $550 price target, and Sector Perform rating assigned to Leidos Holdings, Inc. (NYSE:LDOS) with a $106 price target, and Lockheed Martin Corporation (NYSE:LMT) with a $460 price target.
The analyst’s top pick is L3Harris Technologies based on its leading top-line outlook relative to the defense budget, an expected recovery in H2/22 tactical communications sales (highest margin business) and its margin upside potential.
The analyst believes the defense fundamentals remain favorable, and the elevated defense spending will justify a positive re-rating on the sector, with the war in Ukraine expected to drive near-term upside in sentiment, while the persistent China risk will support long-term sentiment and funding upside.
RBC Capital models top-line U.S. defense budget growth of approximately 3% through 2027. According to the analyst, International does represent incremental upside as funding levels increase in NATO countries, with L3Harris Technologies, General Dynamics Corporation and Lockheed Martin Corporation best positioned to benefit from greater international sales.
