Defense: Lesser-Known Names to Watch

By Guy Adami

After Veterans Day this week and with the tragedy at Foot Hood still at top of mind, I thought it would be an appropriate time to discuss the aerospace and defense sector.

As you know, we have five military branches: the Army, Marine Corps, Navy, Air Force, and Coast Guard. Depending upon what numbers you believe, the U.S. military receives about $725 billion per year in funding. That number constitutes about 50 percent of the global military expenditures. Suffice to say, the United States has the largest defense budget in the world.

Within that budget there are many "high ticket" items. The first that comes to mind is the Lockheed Martin (LMT) / Boeing (BA) F-22 Raptor. The F-22 Raptor is the fifth generation of the fighter aircraft. Simply stated, the F-22 Raptor is a stealth technology aircraft that will undoubtedly be the most advanced fighter plane ever built.

This program has not been cheap, with costs totaling about $65 billion to date. But as the battlefield continues to change, a rising number of players are taking on larger roles in the space.

On Monday in Advantage Point, I highlighted L-3 Communications (LLL) and their role in "asymmetrical warfare." Again, for those unfamiliar with that term, it is defined as opposing forces having decidedly different strengths. Nowhere is that more evident than in the war in Iraq and Afghanistan.

The space is dominated by a few familiar names, including Boeing, Lockheed Martin, Northrop Grumman (NOC), Raytheon (RTN), and General Dynamics (GD). But there are other stocks that should be on your radar screen if you are looking for tertiary plays. Among them are the following:

Alliant Techsystems (ATK). ATK develops and produces military ammunition and gun systems. The company is divided into four business groups: Armament Systems, Mission Systems, Space Systems, and International Products. After the market closed Wednesday, ATK reported its second-quarter earnings. EPS of $2.19 easily beat the consensus number of $2.06 on revenues of $1.21 billion. Alliant also raised its full-year outlook, saying that earnings would come in $8.60 to $8.75 per share.

Rockwell Collins (COL). Its chairman and CEO is Clayton Jones, one of the best executives in the industry, if not the country. COL plays a major role in the design, production, and support of communications and avionics for both military and commercial customers worldwide. COL reported a better-than-expected fourth-quarter EPS on Nov. 3. However, both revenue and guidance were viewed as disappointing by some analysts who cover the company.

Goodrich (GR). As this company likes to say, "If there's an aircraft in the sky, we're on it." GR is a supplier of aerospace components, systems and products to the global defense and space markets. GR reported its third-quarter earnings on Oct. 22. Like COL, it beat expectations on profit but came in light on revenues. Later that day, GR was downgraded to "neutral" from "accumulate" at Buckingham, which cited valuation. Its price target of $59 stayed the same, but it is worth pointing out that GR made a new 52-week intraday high of $59.67 yesterday.

The knock on the entire sector was the fear that the Obama administration would cut defense spending. That remains to be seen, but it is important to point out that defense spending around the world is on the rise.

Now for a bit of housekeeping from that earlier Advantage Point column, in which I discussed the origins of Veterans Day. Many years ago Congress declared the 11th day of November in each year a legal holiday, but I mistakenly thought that Veterans Day fell under the Uniform Monday Holiday Act.

That law amended the U.S. Code to establish the observance of certain holidays on Mondays, including Washington's Birthday, Memorial Day, Columbus Day, and Veterans Day. However, I failed to remember that another act of Congress in 1975 moved Veterans Day back to the traditional 11th day of the 11th month of the year, effective in 1978. My apologies for the error.

None of this matters in our views of the sector, of course. All the companies mentioned above continue to expand their global footprints. The fact is that this is a growing industry with some with some downstream names that are worth a look.

Disclosures: I do not have positions in any of the stocks mentioned.

(Chart courtesy of tradeMONSTER)