3 Top Defense Stocks to Consider Amid Middle East Conflict

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Amidst the ongoing conflict between Israel and Hamas, the geopolitical landscape in the Middle East is heating up. The shadow of Russia’s invasion of Ukraine also continues to cast a long shadow over Europe. While U.S. markets have displayed resilience in response to these developments, some market experts, including Bob Savage of BNY Mellon, are sounding a note of caution, suggesting that investors may not be fully appreciating the risks associated with an “extended war” in Gaza.

Unsurprisingly, the recent turmoil has cast a spotlight on the defense sector on Wall Street. In the days following the outbreak of the Israel-Hamas conflict, the top five U.S. defense contractor stocks saw their combined value surge by over $28 billion. For investors looking to navigate these surging geopolitical tensions, here are three top-rated defense stocks as recommended by analysts:

L3Harris Technologies

L3Harris Technologies (NYSE:LHX) the result of the 2019 merger between L3 Technologies and Harris Corporation, offers comprehensive solutions for the defense, aerospace, and communications sectors. Their product range encompasses aircraft and spacecraft components, electronic warfare systems, and communication systems, among others. With a current market capitalization of $33.4 billion and a dividend yield of 2.57%, L3Harris has faced a 14.7% decline in its stock value in 2023. However, the company reported second-quarter revenues of $4.7 billion, up 13.5% from the previous year, with an order win of $5.6 billion, and EPS of $2.97, slightly surpassing estimates. Notably, L3Harris enjoys the highest adjusted operating margins (15%) among its peers. The recent acquisition of Aerojet Rocketdyne is expected to bolster the company’s presence in the space domain, adding $2 billion per year in revenue.

RTX Corp 

RTX Corp (NYSE:RTX) provides engineering and manufacturing services to the aerospace and defense industry. With a market cap of $106.7 billion and a healthy dividend yield of 3.11%, RTX has increased its dividends consistently for 29 years. Despite a 26% year-to-date drop in its stock price, RTX reported second-quarter sales of $18.3 billion, up 12% year-over-year, and an EPS of $1.29, surpassing estimates. The company raised its revenue guidance for the year to $73.0 billion-$74.0 billion, though a defect in Pratt & Whitney engines affected its free cash flow. RTX maintains a substantial order book of $185 billion, demonstrating its resilience in the face of challenges.

General Dynamics

General Dynamics (NYSE:GD), founded in 1899, is the oldest company on this list. The company specializes in designing, manufacturing, and integrating advanced technology systems and products for the aerospace and defense industry. With a market cap of $64.92 billion and a dividend yield of 2.21%, General Dynamics has consistently raised its dividends for 29 years. Despite a 1.6% year-to-date stock decline, the company reported second-quarter revenues of $10.1 billion, up 10.5% from the previous year. General Dynamics maintains a strong order backlog of $91.4 billion and a history of surpassing EPS expectations. The company’s disciplined fiscal management and steady government contracts, including a recent $768.7 million contract with the U.S. Army, have contributed to its stability.

Analysts have provided various ratings for these stocks, with the potential for upside in their target prices. These defense stocks are worth considering as part of an investment portfolio in the current geopolitical climate.

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